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How to boost your income from smart investments

By TESLIM STITTA-BEY

Investors scared by uncertain corporate performances have sensibly concentrated on capital appreciation for investment yields on the Nigerian Stock market. Data from the market suggest that foreign portfolio investors have gone on a spending binge earlier in the year and have pulled up the market by its bootstraps, but how much steam is in the boiler is yet be determined.

The Nigerian Stock Exchange

The All Shares Index (a measure of market performance) has risen by 10.61 per cent year to date which is better than the -3 per cent yield in the contemporary period of 2017. The ASI has been impressive since the beginning of 2018 comparing favourably with the Argentine Merval (9.5 per cent), the Brazilian Sao Paulo bovespa (14.7 per cent), the Russian RTS Index (14.7 per cent) and the Hong Kong Hang Seng (5.3 per cent).

As the country edges into the heat of full-fledged politicking in preparation for the 2019 elections, investors are thinking up strategies to take advantage of governments obvious attempt at offering an electoral ‘bribe’ by expanding fiscal spending and allocating resources to social transfers and other activities likely to stir electorate interest. High fiscal spending may halt the steady sixteen straight months of falling inflation as the Central Bank of Nigeria pulls back money supply to avert the overheating of the economy.

Analyst have argued that a combination of high domestic public spending and tight monetary policy in 2018 will lead to high domestic interest rates and stall the growth of Gross Domestic Output (GDP) which recently capped 2017 at 1.92 per cent after rising to 1.4 per cent in the third quarter (Q3). Growth in 2018 is largely expected to be in the region of 2.6 per cent for the year; however, a lot still depends on the impatient push of fiscal policy and the enthusiastic pull of the monetary authorities. The two policies are likely to be at daggers drawn by the third quarter as the government hopes to announce a minimum wage rise later in the year. Higher domestic wage rates will put upward pressure on operating expenses and squeeze out corporate profits before interest, tax, depreciation and amortization (EBITDA). This could hurt corporate earnings and dampen dividend payouts.

Regardless of the gloomy potential dividend outlook for the year going forward some stocks may still support decent dividend yields. Total Nigeria, an oil and gas giant has declared a N17 dividend per share for 2017 which on a current market price N242.50 comes to a dividend yield of 7 per cent. Analysts, however, are not too impressed. The problem is not the dividend yield but the lack of capital growth. The company’s share price has slipped from N284.00 in the first quarter of last year to the more recent N242.50 leading to a capital loss of 14.6 per cent. With inflation rate at 15.13 per cent at the beginning of the year (but is expected to drop to 14.1 per cent in February), total real or inflation-adjusted investment yield on the stock is unimpressive. This is not a complete disaster, however. For investors interested in income stocks rather than growth stocks Total Nigeria still throws up one of the best dividend opportunities on the market.

The company’s dividend yield at the end of 2018 is likely to do a lot better than 2017. Total dividend payout in both 2016 and 2017 was N5billion, in 2018 analysts expect company earnings to grow more significantly and allow the company to declare a relatively higher total dividend payout in the region of N6billion or an increase of 20 per cent. If international oil prices remain stable and settle between $65 and $70 per barrel for most of the year and restiveness in the volatile Niger Delta is contained, then both gross and net earnings are likely to surge as nominal dividend payout equally rises. Over time patient investors desiring additional income from dividends will be rewarded and they will also likely have the added satisfaction of some amount of capital appreciation as inflation rates gradually slow to single digits towards 2019.

Admittedly politics-induced fiscal outlay will threaten to raise inflation but tight monetary policy is likely to keep interest rates up and encourage increased foreign exchange inflows as early apprehension of portfolio investors begins to cool off and give room to calmer decision making. The stock market may take a few heavy dips in the run up to political campaigning at the end of the year but this, according to market observers, will only lead to a temporary blip as the second (Q2) and third (Q3) quarters reassure investors of the economy’s underlying strength. According to Victor Enyinaya, portfolio analysts at Capital Base, an Investment Advisory firm, ‘the economic outlook is sturdy. Oil prices can be expected to remain above the 2018 budget benchmark of $45 per barrel and foreign reserves may likely leap above $48billion in core reserves by year end, thereby creating a ‘feel good’ factor for foreign equity investors concerned about foreign exchange translation losses or gains’.

Meanwhile another top stock for dividend searchers is GT Bank Plc. The bank has announced its annual general meeting (AGM) for April 2018 and is likely to declare a nominal dividend of N2.05.This translates to a dividend yield on current price of 4.2 per cent. The good thing about the GT stock, investor’s observe is that it has a reasonable price earnings ratio (P/E) of 10 suggesting strong capital gains opportunities in the months ahead. Stock market analysts reckon that even though the banks div. yield is relatively low, the combined yield of dividend and price gains should keep investors nominal returns ahead of inflation at 14.1 per cent projected for February 2018 (down from a recent 15.13 per cent at the beginning of the year). On a year-on-year basis the bank has seen its stock price rise by a stunning 110 per cent.

Financial observers such as Rotimi Ogunbiyi, Investment Manager at Capstone Assets & Trust believe that income-seeking investors (those looking for high annual dividend payouts)would do best buying shares of multinational companies such as Nestle, Nigerian Breweries, Lafarge Africa, and the major non-indigenous oil marketing companies. According to Rotimi, ‘multinationals typically want to pull out most of their after tax earnings and repatriate the profits to parent companies abroad, this opens a grand window to income-seeking local investors to piggy back on these companies to draw sizeable annual dividend incomes from their investments while holding onto their underlying assets’.

In other words investors pining for handsome dividend payouts in 2018 would do well to keep their eyes on international corporations in the Breweries, fast moving consumer goods (FMCG’s), Building materials and perhaps banking sectors. The economic outlook in 2018 represents a likely full year of positive quarter-on-quarter growth which should place the economy in fine fettle to build upon last year’s recession-busting adventure. Growing consumer demand and construction activities should improve gross and net earnings and likely hammer up nominal dividend payouts. The tea leaves look great and investors on the local bourse should end the year grinning from ear to ear, if as economist tend to say, ‘all things remain equal’.

 

 

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