Nigeria may have a low yield environment, rising inflation, and exogenous currency shocks, but some of its biggest firms are about to deliver hefty dividends to their shareholders.
Of the 30 most liquid and capitalized companies listed on the Nigerian Stock Exchange (NSE), United Bank for Africa (UBA) and Zenith Bank offer the highest dividend yield.
The Dividend Yield is a financial ratio that measures the annual value of dividends received relative to the market value per share of a security. In other words, the dividend yield formula calculates the percentage of a company’s market price of a share that is paid to shareholders in the form of dividends.
What this means is that investors will get more cash flow from owning stocks or shares in UBA and Zenith Bank than any other companies, which makes them more reliable and likely less risky.
UBA has a dividend yield or DY of 11.69 percent while Zenith’s DY is 10.87 percent, which beats the 8 percent average market Banking Index benchmark.
On a sector basis, MTN Nigeria, the largest Telecommunications company in Africa’s largest economy has a dividend yield of 4.58 percent even as it realized sizable income during the lockdown period as demand for data surged.
Dangote Cement, the largest producer of the building material has a dividend yield of 8.28 percent, and analysts are optimistic that the cement makers’ “export and import” strategies will support future sales growth.
Guaranty Trust Bank, the largest lender by market capitalization in Africa’s largest economy has dividend yield of 7.88 percent, while FBN Holdings and Access Bank have dividend yields of 5.10 percent and 7.47 percent respectively.
In the corporate finance parlance as evidenced by the dividend valuations model, a company that consistently rewards investors from distributable profit is considered by investors to be in good health.
A school of thought believes because investors are more concerned about current dividend, dividend per share affects the value of a firm. This is because investors are risk averse and prefer current dividend to future payout and capital gains.
On the other hand, another school of thought is of the view that the dividend doesn’t affect the value of the firm, that the value of the firm is a function of its expected future cash flow discounted to the present value.
Regardless of these two views, for a firm having a rate of return higher than the cost of capital, market price per share is inversely related to dividend pay-out ratio. Decrease in dividend pay-out leads to increase in market price per share. The market price per share is maximum when the dividend pay-out ratio is zero.
The big banks will deliver the best dividend to their shareholders because they have a steady earnings stream and a strong capital buffer that enables them to surmount the macroeconomic headwinds.
However, the coronavirus pandemic that triggered a lockdown that paralyzed business activities across the country dealt a blow to cash flows of companies.
What this means is that companies that recorded losses and have a battered balance sheet may not be able to meet their obligations to shareholders.
International Monetary Fund (IMF) Managing Director, Kristalina Georgieva, had advised banks to halt dividend payment on the expectation of a recession.
As a result of the precipitous drop in oil price due to Covid-19 crisis, oil majors have slashed dividend payments for the first time since the Second World War.
Oil giant Royal Dutch Shell said it had decided to slash its dividend for the first quarter to $0.16 per share, down from $0.47 per share as at the end of 2019.
Similarly, BP, the UK based oil company, has cut its dividend for the first time since the Deepwater Horizon disaster after the coronavirus pandemic hit demand for oil.