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Since the first quarter of 2022, inflation has been undermining the global economy, forcing central bankers to abruptly embark on aggressive rate hikes that expose their economies to a recession.
Of course, Nigeria is not impervious to higher energy prices stocked by geopolitical tensions (Russia invasion of Ukraine) and supply chain bottlenecks; and unfortunately the reopening of borders and the lifting of ban on zero Covid rules by China is not enough to stem rising prices and assuage investors’ fear of an economic downturn in the horizon.
The Central Bank of Nigeria (CBN) through the Monetary Policy Committee has raised monetary policy rates three times last year, finally leaving it at 16.50 percent, the highest in 17 years.
Higher transportation costs, spiraling energy prices, structural challenges with the agricultural hub, and increase in money supply have catapulted the inflation rate to a 17 year high of 21.09 percent.
It is worthy to note that a foreign exchange crisis and political risk bordering on the outcome of the elections and the economic policies of the incoming president have added impetus to corporate profit recession as rising interest rates squeezes profit margins.
As investors employ a wait-and-see approach at the outcome of events that determines the direction of the market and the economy, they can benefit from ‘cash cow’ stocks that garner higher returns.
But identifying cash-rich stocks alone does not make for a solid investment proposition unless it is backed by attractive efficiency ratios like return on equity (ROE). A high ROE ensures that the company is reinvesting cash at a high rate of return.
Nestle Nigeria Plc, MTN Nigeria, Presco Palm Oil, Vitafoam Nigeria Plc, and Total Energies Plc are some of the stocks with the highest returns.
ROE: A Key Metric
ROE = Net Income/Shareholders’ Equity
ROE helps investors distinguish profit-generating companies from profit burners and is useful in determining the financial health of a company. In other words, this financial metric enables investors to identify companies that diligently deploy cash for higher returns.
Moreover, ROE is often used to compare the profitability of a company with other firms in the industry — the higher, the better. It measures how well a company is multiplying its profits without investing new equity capital and portrays management’s efficiency in rewarding shareholders with attractive risk-adjusted returns.
Nestle Nigeria Plc: The largest consumer goods firm by market capitalisation has a return on equity (ROE) of 116 percent, the highest among the largest and the most liquid firms in the country.
Of course, the company that offers a wide range of products across its food and beverage segments is a brand leader in the food and beverage industry despite a challenging environment.
Its strong earnings and consistent profitability are underpinned by market driven and innovative products that are found in homes and kitchens in urban cities and rural areas.
The company has been supporting backward integration, and it has invested N75 billion in research and development (R and D) leading the development of new products like MAGGI powered seasoned powdered seasoning and New Golden Morn Cereal.
MTN Nigeria Plc: With an ROE of 90.12 percent, it is little wonder the largest telecommunication firm by all financial metrics has earned buy ratings on its stocks from various investment houses who have convictions that a propitious and favorable demographic would continue to magnify earnings.
A positive prognosis has meant the telco giant is a growth stock as investors continue to squeeze the fruit and taste the juice as evidenced in consistent dividend payments.
As disclosed by management, data revenue grew by 49.1 percent year on year in first nine months of 2022, while subscriber base was up (+14.5 percent yoy) and data usage (MB/user growth of 52.2 percent) yoy in Q3-22) with the number of smartphones on
Preco Oil Plc: Presco Oil Plc: recorded ROE of 60 percent as the leader in the agric space benefitted from a rally in global oil palm prices which persisted in the half year of last year.
The price of crude palm oil (CPO) as of June 2022 spiked to $1501.10 tonne (VS $1004.12/tonne in June 2021).
Vitafoam Nigeria Plc: The First foam manufacturing company in Nigeria has an ROE of 44 percent as it steadily continues to invest in innovative products and services across its businesses.
The company continued to grow its revenue with improved sales in polyurethane/reconstituted foam (mattress, cushions, pillows, sheetings) and allied products that conform with international standards, and applicable statutory.
TotalEnergies Marketing Nigeria (TEMN) Plc: The leader in the downstream oil and gas industry has an ROE of 40 percent.
Investment house Cordros Securities reiterated its Buy ratings on the company, predicting the company will maintain its resilience in 2023, leveraging its ample storage and distribution network to sustain its sector volume control.
“As evidenced in its preliminary numbers for 2022, we expect the marketer to maintain its strategy of intensifying the output from the higher-margin lubricants space, where it is the current market leader (c. 50.0 percent of market share),” said the analysts.
Across the investment house coverage, TOTAL maintained its resilience as the marketer sustained profitability growth in the year as the marketer intensified its efforts to improve its sales mix and reduce its reliance on PMS as a significant contributor to revenue.