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First Watch: Long-term value for long-term investors

By Akintola Omigbodun

Shares are sold and bought on the floor of the Nigerian Stock Exchange, NSE, each working day of the week. One would notice that from the total number of trades indicated for each day by the NSE, there are not many investors actively trading in their shares.

Rather, it would appear that the active traders are persons/companies who are investing relatively large sums of money on shares. Some of these active traders buy some shares and sell these shares within a short period, sometimes less than a month, for a profit. Some of these share purchases may have been made for pension funds who may not be trading in the shares over short periods but who would rely on the gains in share prices over long periods.

A large number of shareholders hold on to their shares from one year to the next year and the income the shareholders earn from these shares are the dividends declared by the companies. The value of these dividends may not be lower than the gains made by the active traders who have traded over a relatively short period of time.

The requirement of the NSE that companies should report their earnings every three months. There reports usually do not give any reasons for the performance of the companies and in cases of poor results some reference may be made by a company to what in their view is the harsh operating environment.

In contrast, sometime in the last two years, the PZ Cussons Group in the United Kingdom reported that there would be a drop in the group’s earnings given the problems with the disruptions of economic activities in Northern Nigeria. The PZ Cussons company in Nigeria did not make a corresponding announcement.

While the PZ Cussons company in Nigeria declared a bonus of 1 new share for every existing 4 shares plus a dividend of N0.86 per share in August 2011, a dividend of N0.43 per share was declared in August 2012. The annual reports and accounts however indicated that measures had been taken that would lead to an improvement in the company’s profitability.

The practice is that companies in Nigeria hold what is described as a facts behind the figures session on the floor of the NSE for the benefit of members of the NSE. Also, some companies hold what are described as stakeholders’ meetings which are largely meetings of the company’s directors with the shareholders’ associations. The NSE has insisted on timely reports of company financial results in recent times and this has allowed shareholders to know a little more about the companies in which they have invested.

The requirement that companies should file their results quarterly may made the companies realise that they have to show a profit or in the alternative offer explanations of why their operations are unprofitable. There are several companies that have not reported a profit in the last few years and the NSE has recently removed from its trading lists some companies that have not file the required reports.

Long-term investors would want the companies to show a profit and in addition they would want the companies to pay a substantial part of the profits as dividend. The declaration of bonus shares may be useful when the total number of shares available for trading on the floor of the NSE is limited.

Julius Berger Nigeria declared an exceptional bonus of 3 new shares for every existing share in August 2005 as well as a dividend of N0.25 per share. For every 1000 shares in 2005, the shareholder had 4000 shares in subsequent years.

While the shareholder received N250 as gross dividend for 1000 shares in 2005, the corresponding 4000 shares in subsequent years earned gross dividends of N2800 in 2006, N3600 in 2007, a peak of N15000 in 2008 and more recently N9600 in 2012 and N10000 in 2013. Thus one can say that from 2005 onwards Julius Berger Nigeria has given improved value to long-term shareholders.

The significant factor for a company is its costs of doing business, especially personnel costs. The increases in the prices of petroleum products have led to salary increases and consequently increases in pension costs. The Federal Government had to introduce the Pension Reform Act 2004 when it found that it could no longer afford to meet gratuity and pension payments from the government’s current resources.

Companies should take a look at their defined benefits scheme which essentially is the gratuities paid to employees on their retirement. Total Nigeria Plc has provided a new approach which may suit current realities as recent salary increases are not related to increases in the productivity of the workforce and profits are likely to decline or show only marginal increases.

Total Nigeria Plc has what it has called a Defined Contribution Scheme in which the gratuity is computed based on 9.5% of total annual emolument and the sum is paid monthly to Fund Managers nominated by individual employees. This may also offer some protection to employees in a situation of the failure of a company.

We should have the opportunity to take a look at the long-term performance of some companies if and when shareholder’s copies of their annual reports and accounts are delivered.


Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.