Ahead of FY: 2015 Earnings Season… A Focus on Dividend Strategy

After depreciating 17.2% YtD in 2015, the Nigerian equities All Share Index is down 13.8% so far in 2016. The overhanging macroeconomic challenges that persisted all through 2015 lingered on in 2016 as investors’ sentiment on equities continue to wane. Full year corporate earnings are expected to remain pressured across sectors as observed in Q3:2015 where performance scorecards were broadly unimpressive. Notwithstanding the above, the Nigerian bourse sustained a W-o-W appreciation this week following improved sentiment on market bellwethers such as DANGCEM (+17.9%), NIGERIAN BREWERIES (+1.4%) and GUARANTY (+3.5%). We imagine that aside bargain hunting, current valuation also looks attractive for “dividend investors” who may want to take position in stocks with consistent dividend payment history ahead of full year corporate releases. On the back of depressing share prices, dividend yield is expected to improve significantly assuming quoted companies maintain last dividend paid. Accordingly, we highlight our short to medium term equities market return drivers and drags.

As observed in Q3:2015, our FY:2015 earnings expectation for stocks in the banking space remains modest due to the impact of softer loans and deposits growth on earnings, and the overall impact of tough operating environment on impairment charges, cost to income ratio and profitability. Despite tepid outlook, we expect most Tier-1 banks to stay resilient on the basis of their 9-month submissions and stronger risk management in contrast to Tier-2 banks whose performances are expected to be significantly impaired. Hence, we believe most of the Tier-1 banks will retain their consistent dividend payment history.

Similarly, the Consumer Goods sector was heavily hit by weaker consumer spending and exchange rate related cost pressures in 2015. This was reflected in the FY:2015 result submitted by the largest brewer in the sector - NIGERIAN BREWERIES - during the week. NIGERIAN BREWERIES reported a 10.5% decline in PAT to N38.1bn in 2015 as against N42.5bn in 2014. Nevertheless, the Brewer maintained its consistence in dividend payment, proposing an additional N3.60/share dividend (implying a dividend yield of 3.7%), in addition to the earlier N1.20 interim dividend, bringing total dividend paid for the year to N4.80/share (N0.50 higher than FY:2014). Similar to the above, we are bullish on NESTLE, given its impressive 9 months result, sound fundamentals and consistent dividend policy. Our FY:2015 dividend forecast for NESTLE is estimated at N24.10/share (implying a 3.4% yield at current price), thus we advise investors to adopt a dividend strategy in positioning ahead.

Meanwhile, FY:2015 performance may be uninspiring given pressures observed on margins as at September 2015. Notwithstanding the poor outlook, we expect DANGCEM, WAPCO, and CCNN to sustain their dividend payment culture. Our estimate puts average expected dividend yield at 4.1% for stocks within our coverage, creating a compelling investment case for positioning at current valuation.

On the basis of the above, we observed that “dividend investors” can position in key counters with sound dividend payment history. In addition, overall market dividend yield is estimated at 4.3%. Noting that sentiment in the Nigerian bourse would continue to be mostly driven by bargain hunting and earnings releases in the short to medium term, we maintain our position that FY:2015 earnings is expected to be unimpressive, thus we insist that the market remains most attractive to long term domestic investors.

Afrinvest Research

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