Low dividend yields turning investors to government securities

Low dividend yields occasioned by an unfavourable operating environment are seen as responsible for investors’ growing preferences for government securities, some analysts say.

The implication is further worsening of investor confidence in the capital market as well as rising domestic debt servicing costs by government.

The development also has the potential of putting the Monetary Policy Committee (MPC) under pressure to cut rates and force T/bill rates lower to single digits,” Bismarck Rewane, chief executive, Financial Derivatives Company, says in the recent Lagos Business School Breakfast meeting note.

Rewane says, “August dividend yields stand at 6.0 percent against 14.29 percent on Treasury bills. The low dividend yields are turning investors to government securities.”

Primary Treasury bill auction totals in August of N570 billion and Open Market Operations (OMO) auction stood at N1.13 trillion data from the Central Bank show. Interest rates are far higher than dividend yields, disrupting the deposit base of banks and financial institutions.

Rewane notes, “together with the Cash Reserve Ratio (CRR), deposits have sterilised 25 percent of M2, thereby compounding the reduction in aggregate demand.”

Profits from quoted companies, according to the economist, have fallen by about N178 billion.

With higher inflation rate being projected by some analysts, consumer’s disposable income will further deteriorate with the attendant low purchases.

According to the Central Bank of Nigeria (CBN) the deteriorating economic condition is taking a toll on Nigerian consumers as overall confidence outlook in third quarter, 2016 remained downbeat as it has been since Q3, 2011.

The CBN’s Consumer Expectation Survey report released at the weekend showed that at 28.2 index points, consumers’ confidence dipped further by 26.3 points below the level achieved in the corresponding quarter of 2015.

The CBN attributed the poor outlook of consumers in the quarter under review to the deteriorating economic condition and decline in net household income, leading to draw-down on household savings or getting into debt.

Rewane further contends that the “weakness in macroeconomic condition is translating to profitability decline, as earnings and profitability fell short of expectations, worsening investor’s confidence.”