Industrial goods giant, Dangote Cement, has announced that its Board of Directors will propose a stock consolidation and share buyback to its shareholders, a move that would shield the undervalued blue-chip from a further dip in the bearish market and provide a good exit for naysayers, experts say.
“Today, the Board of Directors of Dangote Cement Plc announces that it has considered and subject to obtaining detailed advice and regulatory approvals, will recommend to its shareholders for consideration, a proposal to consolidate its share capital, as well as a share buyback programme,” the cement maker said in a note issued October 29, 2019, and seen by BusinessDay.
The details of the action, the company said, are yet to be finalised and will be communicated at a later date.
“The previous sell-pressure on the stock is uncomfortable to the cement maker and it is trying to give those that want to get out an opportunity to exit,” Paul Uzum, a trader on the floor of the Nigerian Stock Exchange (NSE), told BusinessDay. “A reverse stock split would reduce the company’s float but prop price up. It would ease sell-pressure on the stock.”
Although Dangote Cement is yet to state the ratio for the reverse split, Uzum believes the current market situation would see a price range of N150-N170. Dangcem advanced 2.05 percent to N149 at the close of trading Wednesday.
A reverse stock split, also called a stock merge, is a process by which a company boosts its stock price by reducing the total number of shares held by all its shareholders. If a company announces one-for-two reverse split, for instance, shareholders would receive one share of the company’s new stock for every two shares they hold. If a shareholder owned 1,000 shares each valued at N5 before the split, the shareholder would own 500 shares valued at N10 after the reverse stock split.
On the other hand, a share buyback occurs when a company chooses to reacquire its own stock as an alternative to issuing a dividend, to boost its financial ratios or buy when it is undervalued so it can reissue once its fair price realised, without having to provide new shares.
Dangcem’s proposed move follows a recent measure by NSE to check the frequent fluctuations in the market and ensure market stability.
The stock exchange earlier in October announced an amendment to the price movement of equities traded on the nation’s bourse amid a rout that has plunged stocks to new lows and seen returns currently at -16.3 percent.
With the new rule, the minimum trade quantity required to change prices for equity securities traded on the Exchange will henceforth be 100,000 units for all securities groups.
Oscar Onyema, NSE CEO, said the Exchange remains committed to maintaining a platform that engenders a fair and efficient market, noting that the change is born out of the need to ensure that all price improving (up/down) transactions are material, making the market more efficient and attractive.
Dangote Cement result for the nine months to 30 September shows revenue dropped slightly to N679.79bn from N685.29bn in the same period in 2018.
The cement giant thus reported its profit also reduced, albeit slightly, to N154.35bn from N158.27bn in the same period last year.
Data from Bloomberg show Dangcem currently has a dividend yield of 10.64 percent.
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