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Investors to receive boost from Zenith Bank’s robust dividends

…analysts place buy ratings on stock …most attractive valuation among peers

Investors will receive much in dividend income from Zenith Bank Nigeria Plc’s stock than its peer rivals as the lender’s net income crosses the N200 billion mark.

“This means investors will get double digit yields compared to Treasury bill (TB) yield. This is the best time to Buy Zenith,” said Wale Okunrinboye, analyst at Sigma Pensions Limited.

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Investors reacted positively to the fourth quarter results of the lender as dividend yields spiked to 15.43 percent as at Friday while the share price, which has been rising since the start of the year, appreciated by 2.82 percent to close at N19.85 as of 2:00 pm in Lagos.  

The 15.43 percent dividend yields compares with Guaranty Trust Bank (GTB)’s (9.82 percent); Access Bank, (5.26 percent); United Bank for Africa (UBA), 11.49 percent, and First Bank Holdings, (4.52 percent).

What this means is that an investor will get N150,000 in dividend for every N1 million he or she invest in Zenith Bank’s stocks.

The dividend yield is the ratio of a company’s annual dividend compared to its share price.

At the moment, several bank stocks have gross dividend yields well in excess of the T-bill yield, and comparable if not higher than FGN bonds.  

Zenith Bank announced on Friday on the website of the Nigerian Stock Exchange (NSE) that it has declared a total dividend (interim and final) of N87.05 billion or N2.80 a share.

From 2012 to 2019, the lender has returned cash to shareholders to a tune of N540.78 billion, and it recorded a net income of N208.84 billion to end 2019 financial year.

The growth in earnings was largely driven by strong growth in non-interest income as it continues to make an inroad into the online banking space.

Zenith Bank has one of the most attractive valuation among peer rivals as it has a price to earnings ratio of 2.98 times, which compares to GTBank, (4.24 times); and FBN Holdings, (3.99 times).

The largest lender by profit in Africa’s largest economy has a price to earnings growth of 0.27, which means its shares are trading at a discount to its growth rate.

The price/earnings to growth ratio (PEG ratio) are a stock’s price-to-earnings (P/E) ratio divided by the growth rate of its earnings for a specified time period.

PEG ratios higher than 1 are generally considered unfavorable, suggesting a stock is overvalued. Conversely, ratios lower than 1 are considered better, indicating a stock is undervalued.

Zenith’s stellar performance comes amid regulatory uncertainty in the banking sector.

Analysts are of the view the stringent rules put in place by the central bank to spur lending to the real sector of the economy could crimp earnings of Nigerian banks,  casting a pall to industry future payout.

The hike in CRR to 27.50 percent from 22.50 percent means more deposit will go from lenders to the CBN and return zero which means their interest income, which is a major components earnings, will reduce.

The central bank had mandated Deposit Money Banks (DMBs) to maintain minimum Loans to Deposit (LDR) ratio of 65 percent, but analysts say forcing banks to lend to risky sectors will result in huge write-offs and rising Non Performing Loans (NPLs).

“These are regulatory headwinds they have to contend with. They have to deal with the recent slashing of bank charges,” said Johnson Chukwu, managing director and CEO of Cowry Asset Management.

“It will affect dividend declaration. No bank will start paying dividend from reserves as they will want to settle from current profit. There is cap on such payment by the regulator,” Chukwu said.

Analysts say at United Capital Ltd say additional 5 percent CRR is equivalent to N1.2 trillion quarantined by the CBN and that Open Buy Backs (OBB) and overnight (O/N) rates will likely to spike in the short term.

“It is negative for banks’ profitability and revenue as rates on fixed deposit will likely increase,” said analysts at United Capital Ltd.

The cumulative interest income of the largest Nigerian banks increased by 8.0 percent to N2.06 trillion as at September 2019, the lowest in five years, according to data gathered by BusinessDay.

Following CBN’s announcement barring non-banking corporates as well as individuals from accessing the OMO market, increased liquidity in the secondary debt market as well as auctions has since sent yields crashing.

There has been a sharp decline in Nigerian Treasury Bills rate at the primary market auction over a three-month period from 12.94 percent before the announcement was made to 5.1 percent at the last auction.

“We believe key institutional investors with trillions of debt assets maturing in 2020 will be searching for alternative investment opportunities given negative real returns on debt and money market instruments. Thus, we expect some of these funds to filter into the equities market,” said analysts at CSL Stock Brokers Limited.

 

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