Coronation research analysts identify ‘best stocks’ for total return

Coronation Research analysts last week noted how the total return of its Model Equity Portfolio was some 4.79 percentage points higher than its share price return. For the research analysts, this brought forth questions on which of the top 20 stocks in the NGX All-Share Index have provided the best total return, year-to-date (YtD)? And do available data provide a good guide to investing? Though total returns do not give a complete guide to investing in the stock market, but they certainly help investors navigate the hurdles.
Data still providing good guide to investing

Notably, the Nigerian Exchange Limited (NGX) All-Share Index last week extended gains for the second consecutive week, up 6.88percent, the biggest weekly gain since December 18, 2020, to settle at 47,554.34 points, the highest point since October, 14. As a result, its year-to-date return rose to 11.33 percent.

Top-20 stocks that have provided the best total return YtD

In their November 28 ‘Nigerian Weekly Update’, Coronation Research analysts identified best stocks for total return.
“The total return is given by receiving dividends from a stock and reinvesting them immediately. The next question is: “Which of the top 20 stocks in the NGX All-Share Index have provided the best total return, year-to-date?”

The answers are, in descending order for the top five returners: BUA Foods, whose total return year-to-date has been 69.4percent; Seplat, with 67.2percent; Airtel Africa with 54.1percent; Okomu Oil with 30.5percent and ETI with 29.4percent,” Coronation Research analysts noted.

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Furthermore, they noted that “In most of these cases the underlying share price performance has been the main driver of the total return. Airtel Africa, for example, has delivered 51.8 percent in share price return, year-to-date, and 54.1 percent in total return.

“In other cases, the payment and reinvestment of dividends has made a material difference, as in the case of BUA Foods whose share price return, year-to-date, has been 58.5 percent but whose total return has been 69.4percent”.

“In terms of total return, Okomu Oil is the outlier among the top five returners. Its share price return, year-to-date, has been 18 percent but its total return has been 30.6 percent, 12.6 percentage points higher.

“Okomu Oil has been generous this year (a peak year for palm oil prices), paying a dividend of N8/share in May, a further N7/share in August and N2/share more in November”, Coronation Research analysts noted.

Finding generous dividend payers

“It makes sense to separate out share price returns from total returns in order to identify generous dividend payers.

“When we commenced this part of the study, we thought the results would feature mainly bank stocks, as banks are typically generous dividend payers. In fact, there are as many non-banks as banks among the top scorers.

“Okomu Oil, BUA Foods, MTN Nigeria, Dangote Cement, Dangote Sugar and Seplat are the industrial stocks, among the top-20 index weights, whose total returns have exceeded their share price returns by five percentage points or more, so far this year.

“It would be tempting to build a portfolio around these stocks. After all, generous dividend payers are generally profitable companies. The problem one might encounter is liquidity.

“The top-five stocks which we measure by excess return over share price return (Okomu Oil, UBA, Zenith Bank, BUA Cement and GTCO) account for just 10.92percent of the market by index weight,” said Coronation Research analysts in their recent insight.

“All the same, it is worth bearing this factor in mind when constructing a portfolio because it may make sense to construct overweight positions accordingly. Investors disproportionately trade stocks with high dividends; trading volumes of banks vastly exceed the volumes in any other sector, despite the six banks in our charts making up just 11.62 percent of the index. Bank stocks also tend to have high free floats, so there are plenty of available shares to trade,” the analysts said.

Takeaways from the above

“Not all generous dividend payers are good performers in terms of stock prices (this is true of most of the banks, so far this year), but when the underlying fundamentals driving a stock are favourable, it makes sense to follow the generous dividend payers and to reinvest,” Coronation Research analysts noted.