Dividend payment and investing in the time of recession

There are two types of people; those who keep making money by working till they die and those who keep making money by having their assets work for them. Many Nigerians invest in different asset classes but the most popular among Nigerians for decades have been equity-based instruments, real estate and commodities.

The crash of the Nigerian stock market in 2008 hit many Nigerians who have invested so much in equities. Although, the market became bullish afterwards, the market is currently not enjoying its best moments, with the market suffering frequent losses. If the Prospect theory (during Bullish period, the investor remains risk averse while the attitude of investor in bearish period remains risk seeker) is anything to go by, many investors will have high appetite for risk during this period of economic recession in the country as they look for investment opportunities.

Making the right stock investment choice

An investor who wants to receive a steady income should consider investing in established companies which are mainly concerned with keeping their shareholders happy with dividend payments. Investors also regard dividend payment as a sign of a company’s strength. To them, it shows that a company’s management has positive expectations for future earnings, making the stock more attractive. With improved demand comes increase in stock price.

However, this does not mean stocks of companies that do not pay dividends are bad. For growth companies whose expenses from growth initiatives may sometimes exceed their net earnings, paying dividend would be difficult. Other firms have even decided not to pay dividends under the principle that their reinvestment strategies will lead to greater returns for the investor. Therefore, non-payment of dividend may not necessarily mean the stock is bad. Investors should also look out for growth prospect and performance of companies they plan to invest in. For example, Wema Bank Plc. reported an 11 percent rise in its pre-tax profit to N1.30 billion. It also has plans to raise new capital to fund growth and expansion. Its shares could be perfect for the future.

When the Managing Director of the bank Segun Oloketuyi spoke after the bank was granted a national banking license in 2015, he explained the bank’s growth trajectory. “Six years ago, we took a decision to refocus the bank’s operations in its areas of strength and build a sustainable institution.

“We took advantage of the new licensing regime and applied for a regional authorisation with a pledge to expand in the near future once the turnaround project was completed.”

Mr Oloketuyi said that the bank’s transformation was implemented in three phases to stabilise the bank, prepare the building blocks for growth and to go for growth. The bank is now in the third phase of the transformation project.

He added that the bank would focus on areas where return on investment would be maximised and shareholder value enhanced over the medium to long- term.

How bad can non-payment of dividend be for companies?

“The reason why companies will find it difficult to raise money from the capital market is not just because of economic downturn but their inability to declare dividend for several years,” Vanguard quoted Mr. Boniface Okezie, Chairman of Progressive Shareholders Association of Nigeria (PSAN) to have said. “Some of these companies have not declared dividend for many years, so there is lack of confidence in their management’s ability to meet shareholders’ expectations.”

“For instance, Wema Bank has not paid dividend for more than four years. So, how can investors be encouraged to invest in such a company especially in this present economic downturn?”Okezie asked. Wema’s growth prospect and performance answer Okezie’s question. More so, Wema Bank is not raising capital from the equity market. The lender is planning to issue N20bn in bond once it gets regulatory approval. Here’s the difference: Bonds are a form of debt security. They are generally less risky than equity investments (stocks). However, they offer lower potential returns. With the current market uncertainties and the promise shown by Wema Bank’s performance, risk averse investors are expected to see the Wema Bank bond as a safe investment option.