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Friday, July 1, 2022

Dividend Cover Flashes Warning for Nigerian Breweries’ Investors

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Nigerian Breweries saw dividend cover fall to the lowest in five years as sluggish profit and high payout could leave the company with a weakened balance sheet as the industry felt the pang of the virus.

The brewer had slashed the dividend to shore up the balance sheet and conserve cash amid uncertain macroeconomic.

The data shows coverage ratio will stand at 0.53, which means dividends have exceeded distributable profit as payout ratio has hit 187 percent, the highest in six years, based on MoneyCentral Calculation.

A range of 35 percent to 55 percent (payout) is considered healthy and appropriate from a dividend investor’s point of view.

Dividend coverage ratio measures the adequacy of a company’s current net income with reference to its dividends. It is calculated by dividing net income available for common stock-holders by the dividends paid to the common stock-holders. Dividend coverage ratio is inverse of dividend payout ratio.

On the other hand, the dividend payout ratio is the ratio of the total amount of dividends paid out to shareholders relative to the net income of the company.

The company said in note to the financial statement that the declared dividend of N1.76 represents the final dividend per share proposed for the preceding year (151 kobo) but declared in the current year and the interim dividend per share declared during the year (25 kobo).

Notably, the directors have proposed a final dividend of 69 kobo per share (2019: 151 kobo per share) based on the issued share capital of 7,996,902,051 ordinary shares of 50 kobo each subject to approval by the shareholders at the Annual General Meeting fixed for 22nd April, 2021.

Normally in recession years, companies have flexible dividend targets so that dividends do not exceed profit, but most consumer goods firms pursue an aggressive payout policy because investors are used to getting such income for over 3 decades.

Any attempt to tamper with such payment could be misconstrued by investors as signs of deteriorating financial conditions.

There isn’t nothing wrong with a company distributing all profit as dividend in so far as it can raise capital from either the capital or debt market to shore up working capital position and fund expansion plans. This is because the value of a firm is the discounted present value of cash flows over a period of time.

The shareholders of Nigerian Breweries will be paid a cumulative N14.08 billion dividends for the year 2020 or N0.94 (based on current figures), and that is 24.46 percent higher than 2019’s N14.08 billion.

However, based on the final declaration by directors, shareholders will get N7.52 billion, which is 69.65 percent lower than 2019’s figure.

The brewer has a dividend yield of 2.98 percent, and a price to earnings ratio of 64 times. Its market capitalization stood at N471.12 billion as at 2:00 pm Lagos on Friday.

Nigerian Breweries and its peer rivals were among the hardest hit from the coronavirus pandemic that forced the government to shutter bars, restaurants, and nightclubs as economic activities were paralyzed.

Before the coronavirus pandemic broke out, the industry had been reeling with weak consumer purchasing power, hefty taxes on alcohol, and a difficult operating environment, while volumes were plummeting.

Inflation for the month of January stood at 16.47 percent, the highest in 17 months, according to data gathered by the National Bureau of Statistics (NBS).

The manufacturing sector contracted by 1.5 percent in the fourth quarter of 2020, a similar pace to the contraction in the third quarter of (Q3-2020), according to data from the statistics body.

Nigerian Breweries net income dipped by 54.20 percent to N7.36 billion as at December 2020 as profit margin continues to deteriorate.

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