CBN’s rate hike will further worsen dividend payout – Analysts 

EXPECTATIONS of attractive dividend payout by quoted companies in the Nigerian stock market have further been dashed by the Central Bank of Nigeria’s (CBN) recent monetary policy rate (MPR) hikes, analysts said.

The analysts spoke with The ICIR on the backdrop of the recent rate hike, expressing concerns that the decision would negatively impact the equities market, lower investors’ confidence, and possibly erode attractive dividends companies might want to pay.

At its first MPC meeting in February, the apex bank raised the MPR by 400-basis-point to 22.75 per cent and subsequently increased it by 200-basis-point to 24.75 per cent in March.

The decisions are expected to weaken investors’ confidence in the equities market and worsen the operating environment for businesses that have already been hampered by the Nigerian government’s reforms on the fuel subsidy and exchange rate unification, the analysts said.


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The ICIR reported that most companies, including Nestle Nigeria, Dangote Sugar Refinery, International Breweries, Nigerian Breweries, and Cadbury Nigeria, posted losses in their operations due to the exchange rate unification.

Explaining the relationship between the equities and fixed-income markets, an investment and portfolio analyst, Abel Ezekiel, said investors would prefer to shift their portfolios as the risk in the former is higher than the latter when the MPR is raised.

“If there is an increase in MPR, the rate at which the government wants to borrow money from investors will rise. It will now make investors dump the stock market, bond market, treasury bill and other fixed-income assets.”

He noted that since the apex bank increased the benchmark rate by 400 basis points in February, it had had some consequential effects as the equities market started having bearish runs.

“I don’t expect high dividend payment because the cost of funds has increased, and it would impact companies’ profits and dividend payout.

He said also that there could be a high risk of non-performing loans for the banks when they pass the high cost of funds to their customers.

The fixed income space is a riskless asset whereby your return is inevitable, Ezekiel said, explaining further that with the 24.75 per cent MPR hike, investors could efficiently allocate most of their asset class into the fixed income market and be rest assured of getting return even if at a discount compare to the about 31.7 per cent inflation.

“But investors will consider that even if I can’t beat inflation figures based on the current MPR of 24.75 per cent, I can definitely get some returns in the fixed income rather than put my money in the equities market where I am not certain what to get.”

He, however, pointed out that the best asset that could tackle inflation and do better than inflation is the equity market, suggesting that the CBN moderates the monetary policy tool to bring down inflation.

“For instance, they sold dollars to the BDCs; let’s see if that will bring down the cost of goods. Unless the exchange rate comes down, the input price of the product comes down, and we have stability in our energy. We will not see inflation coming down,” Ezekiel added.

On his part, an operator in the capital market, David Adonri, said the rate hike could cause assets to migrate to debt.






     

     

    “There is a tradeoff between equities and debt in the capital market. When interest rates rise, financial assets flow from equities to debt. It becomes the other way around if the interest rate drops.

    “The recent increase of MPR will reduce the current overheating of the equities market. Investors are expected to enter debt to seize the rate hike benefits.”

    He ruled out the possibility of attractive dividend declaration from most manufacturing companies but believed that the banks could do better.

    “The results released by many manufacturing companies do not elicit short-term interest in them. They may be sacrificed for debt, but expectations are high that banks may propose impressive dividends,” Adonri said.

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