At the beginning of the year and prior to the release of the 2012FY, we were very bullish on the dividend expectations of companies, given the outstanding and attractive results as of Q3:2012. Our dividend portfolio had stocks with 7 percent minimum dividend yields in addition to potential capital gains of at least 15 percent. Has our projection come to pass?
A review of the companies that have released both 2012FY results and corporate actions showed that they have largely been in line with our forecasts except for few surprises.
Why are share prices not rallying even though performances and corporate actions are much in line with forecasts?
A simple answer to this is that most stocks have rallied at the beginning of the year, both in anticipation to the dividend expectations and the sufficient liquidity in the system. Most stocks at a time were trading above their target prices; some still do now, despite the sell-off currently experienced.
Most companies’ results were in line with market expectations and since a couple of the stocks were already trading at their year highs and fair values, value investors as well as the speculators decided to take profit. Hence, the current market selloff.
But then for how long should this persist? It should be as long as the prices are well below the 2013 companies’ earnings expectations. Although we expect current market mood to moderate, we believe that Q1:2013 results might cause few spikes.
Despite the lull in the market, few companies with earnings surprises have been enjoying investors’ patronage and the share prices have consequently rallied beyond the earnings surprises. OKOMUOIL has been the toast of investors. The company declared N7 dividend and 1 for 1 bonus issue. The counter has recorded above 40 percent in the last one week of trading. Okomu Oil’s corporate action surprises was in its second year as the company 2011FY results dividend yield of 22 percent was the highest in 2012.
As said earlier, Q1:2013 results will play a role in market direction in Q2:2013. Access Bank and Diamond Bank took the lead.
However, market punished Access Bank for the 20 percent earnings decline which they partly attributed to increase in AMCON surcharge from 0.3 percent to 0.5 percent, but praised Diamond Bank for the 11 percent earnings growth as of Q1:2013. Bank’s earnings performance in 2013 may be lower than 2012, given the lower yields which in turn affects interest income. Increased risk assets creation should help offset decline from treasury income though how high each bank can grow its loan will depend on its capital adequacy level (CAR).
Looking ahead… what does the market hold in the near term?
About 30 percent of the actively traded companies have released their result but a lot more are yet to do same. Ordinarily, they all should have made their result public given NSE regulation that require all companies to release full-year result a maximum of 90 days after year-end. This year however, the NSE gave a further grace period of 30 days (lapse April end) to allow companies conform with the new regulatory requirements, IFRS majorly.
Companies that are yet to release result include Dangote Cement, First Bank, Skye Bank, ASHAKA, OandO, ConOil, UBA, Eterna, Fidelity Bank, etc. We have analysed the reaction of investors to the results released so far and we notice three interesting trend.
The trends are – for companies whose results met expectation, price movement is minimal ±2 percent because those expectations have largely been priced into the stocks by speculators. Companies that outperform expectation in terms of dividend or bonus for instance Okomu Oil which declared N7 dividend and 1 for 1 bonus, market’s reaction was outstanding as the stock gained about 50 percent. The last category are the companies that performed below expectation in terms dividend, the market immediately dump the stocks with some of them losing more than 20 percent for instance Diamond Bank and Access Bank. Diamond Bank has however regained loss grounds due to its Q1 result.
Generally, for the banks that are yet to release results, we have a positive expectation in terms of their profit growth because 2012 was a year they invest majorly in treasury bills and FGN bonds, hence, we do not expect any major bad loan provisioning that will considerably affect their profit. If they pay a dividend which meets our expectation, we will not expect major rally in their prices – just something in the region of 5 percent price movement. This is because the market has largely priced this dividend which makes the yield (return) on them between 5 percent and 7 percent.
However, if they outperform our dividend expectation we will expect price to move by about 20 percent while we expect their price to decline by about 20 percent if they do not meet expectation. Our dividend forecast for each of the stocks can be accessed from our weekly stock recommendation on www.meristem.ng.com/rhub.
We expect the current selling down to pave way for a new attractive entry position in the foreseeable future, as a new support and resistance levels emerge. Be that as it may, we see a re-emergence of cautious position taking in stocks with impressive upside in Q2:2013. However, we advice that investors should closely watch the market and take cautious positions in value stocks that currently trade below their industry and historical PE ratios.
