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Consumer firms’ beloved dividends are on shaky grounds

Consumer goods firms in Africa’s largest economy, whose shares have been under pressure due to a confluence of factors, may have to slash dividend as their financial conditions deteriorate.

Because dividends are a distribution out of profit to shareholders, an increase in earnings means investors will be rewarded more for taking risk in the entity.

For instance, the largest consumer goods firms quoted on the Nigerian Stock Exchange paid a combined N85.19 billion in dividend in 2018, which represents a 10 percent increase from the 2017 figure.

“Seventy percent of them will still maintain a steady pay-out this year but it won’t be as high as other years as they are struggling to surmount the headwinds,” said Abiola Gbemisola, equity research analyst at Chapel Hill Denham Limited.

“International Breweries may not pay dividends this year and it may not pay even next year if it turns a profit,” said Gbemisola.

Ayodeji Ebo, managing director and CEO of Afrivest Securities Limited, said dividend payment would be challenging in 2019 due to challenging business environment and higher cost of production.

“The hike in Value Added Tax (VAT) and excise duties means higher costs and lower profit margins as firms are finding it difficult to pass on rising cost to the final consumer,” said Ebo.

Companies in the industry had been very popular with investors because of their steady dividend payment regardless of performance.

Some companies have a 100 percent pay-out ratio, which means they distribute nearly all their earnings as dividend.

In 2018, Nigerian Breweries Nigeria plc paid N14.64 billion in dividend to its owners out of a profit of N7.51 billion, which translated to 195 percent payout ratio, even as the largest brewer recorded a sharp drop in the bottom line.

That same year, Nestle Nigeria plc, the most capitalised consumer goods firm, paid its owners N37.06 billion in dividends out a profit of N43 billion, which translated to a payout ratio of 86.17 percent.

The recent stumbles in companies’ earnings suggest they are more out of favour with investors than their peers in other sectors.

The industry has been beset by weak consumer spending, poor job creation, border closure, and eroding impact of double-digit inflation which hurts margins.

Analysts at CSL Stock Brokers say FMCGs, particularly businesses with product portfolio skewed towards personal care, will continue to struggle with volume growth in 2020 as familiar challenges continue to bite.

The research house added that beverage producers, particularly cocoa related), would witness significant pressure on margins in 2020 as the cartel formed between Ghana and Ivory Coast (both of whom control 60 percent of world cocoa output) would keep cocoa prices high, hence significantly impacting material costs.

Nigerians are getting poorer as over 50 percent of a population of 200 million live on less than $1.98 a day, which means they have little in their pockets to go shopping.

Inflationary pressures and the hike in fuel price continue to hurt consumers’ ability to increase expenditure which in turn continues to pressure consumer companies’ revenue.

Inflation for the month of December accelerated to 11.98 percent, the highest in seven months, as price of basic food stuffs skyrocketed on the back of border closure.

High level of unemployment at 23.1 percent as at September 2018 and poor job creation continue to pressure expenditure levels. Only one out of five of new entrants to the labour force can get a job.

The recent earnings releases by some firms are disappointing, underscoring the tough and unpredictable macroeconomic environment they operate in.

International Breweries recorded a loss of N9.13 billion to end 2019 financial year as it continues to grapple with slow sales, rising costs, and debt pile.

Total debt of the brewer has risen to a level that represents 84.15 percent of its enterprise value, a sign of distress that shows equity value falling.

Nascon Allied Industries plc saw a 56.75 percent drop in profit, the worst results in five years, as revenue growth couldn’t cover or absorb spiralling cost of production.

Guinness Nigeria plc’s net income dipped by 32.45 percent to N1.74 billion as at December 2019, while net margins dipped to 2.55 percent in December 2019 from 3.80 percent the previous year. An increase in price of key products could underpin future revenue as brewers in the country are the hardest hit from a harsh and unpredictable macroeconomic environment.

BALA AUGIE

 

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