Beer makers' retained earnings plunge, threatens dividend payments

Beer makers have recorded significant retained earnings plunger in the first nine months of 2023, a development that is posing threats to their ability to pay dividends for the 2023 financial year.

Four beer makers listed on the Nigeria Exchange, namely International Brewery, Nigeria Breweries, Champions Brew, and Guinness Nigeria Plc, collectively incurred retained losses amounting to N53.39 billion.

This is a shift from the N102.82 billion in retained earnings recorded during the same period in 2022.

“The overriding concern that has triggered a situation where businesses have negative retained earnings in the breweries sector can be largely traced to the recent Naira devaluation which has significantly impaired value for businesses with huge dollar exposures amid the protracted decline in purchasing power in the Nigerian economy,” Ayodeji Ajilore, an investment research analyst with ARM said.

Retained earnings are the net income left over for the business after it has paid out dividends to its shareholders, which is an equity account.

Negative retained earnings often serve as indicators of prolonged financial losses, potentially foreshadowing bankruptcy. Such circumstances may also imply that the company disseminated borrowed funds to shareholders in the form of dividends.

Nosike Nwajide, team lead, research, Agusto & Co. noted that the weaker exchange rate has also driven up the costs associated with servicing foreign debt obligations, putting a further strain on profit margins.

The beer maker cumulatively reported losses after tax in the period under review. This loss amounted to N96.69 billion, contrasting with the profit after tax of N16.42 billion recorded during the same period in 2022.

These losses can be traced back to the unification of the foreign exchange by President Tinubu in the first half of 2023 and the consistent increases in interest rates by the Central Bank, aimed at curbing inflation.

“The shift to a floating exchange rate triggered a steep depreciation of the naira and culminated in major FX losses,” Nwajide said.

Throughout the year, Nigeria’s economy has faced multiple challenges, including a cash crunch in the first quarter, uncertainties related to the presidential election, inflation concerns, heightened interest rates by the Central Bank to combat inflation, rising input costs, and foreign exchange losses due to the unification of foreign exchange markets.

Nwajide noted that the implication of retained losses could limit the financial flexibility of the brewer, which could constrain their ability to embark on new projects or expand their operations.

“Negative earnings could therefore make a brewer seem less attractive to investors, who may view the company as having a weaker financial position and less growth potential.

“It could lead to potential credit rating downgrades, making it challenging to secure loans and funding for business operations, and would also reduce the ability to engage in share buybacks,” he said.

Nwajide noted that some brewers passed on some of the costs to the consumers in the form of higher prices, but the weaker purchasing power of the average Nigerian consumer resulted in less beverage consumption.

Revenue of the beer makers in the review period grew by 6.1 percent to N653.37 billion, primarily attributed to price increases.

“While FX illiquidity remains a challenge, efforts by the CBN to clear the FX backlog could provide respite much sooner than anticipated. A $10 billion inflow would ease currency pressures in the near term, and lower the premium at the parallel market. Crucially, it would ease FX constraints at the official window and could allow brewers to obtain most of the FX at the official price,” Nwajide said.

Firms Analysis

International Brewery

International Brewery, a subsidiary of the AB InBev Group, the world’s largest brewing company, recorded an increase in its retained loss during the first nine months of 2023.

This increase amounted to 119.9 percent, totalling N86.86 billion, compared to a retained loss of N39.49 billion reported during the same period in 2022.

The retained losses signify that the company recorded a loss after tax. Loss after tax in the first nine months of 2023 grew by 917.7 percent, reaching N28.6 billion, a stark contrast to the N2.81 billion loss reported in the same period in 2022.

The company’s loss after tax for the nine months can be attributed to the rising finance costs it incurred.

The interest expenses on its borrowings surged by 244 percent year-on-year when compared to the corresponding period in 2022.