Low Interest Rate: CHD Advises Investors on High Dividend Yield Stocks
As an entry or re-entry points, investment experts at Chapel Hill Denham Limited (CHD) have advised investors to buy high dividend yield stocks for 2021 on account of cheap valuation.
A number of names were provided, including United Bank for Africa shares, Zenith, Guaranty Trust Bank and Access Bank Plc.
Apart from banking names, there are other big names in the fast moving consumers goods sector (FMCG) with Dangote Sugar, and Lafarge ranking strongly.
Generally, there is an expectation that the Nigerian Stock Exchange equities segment would witness some sort of bullish session down the year as a result of monetary policy rate cut.
Investors would shake off low yield return for stock market return, though on a negative turns but expectation for positive year end has remain strong.
In its equity report, Chapel Hill Denham said in its equity note that dovish monetary policy stance of the Central Bank of Nigeria and liquidity glut in the financial system have been driving yields lower in recent months.
The thing is, these highly priced investment bankers believe that the trend will likely be sustained till the end of 2020.
Accordingly, they believe, ahead of 2021, that investors should by high conviction equities that offer significantly higher dividend yields compared to the yields on fixed income securities.
“We recommend that investment portfolios should buy ahead of ‘the dividend rush’ in Q1-21 considering low valuations”, Chapel Hill Denham advised investors.
Based on dividend yields records, Chapel Hill Denham top picks in the banking segment include United Bank for Africa, Zenith Bank, GTBank and Access Bank Plc.
In the consumers’ good segment, analysts advised investors to consider Dangote Sugar, and Lafarge among its top picks.
“Tracking the dividend yields of our coverage versus the 10-year bond and 1-year T-bills yields shows that some of the names had stronger dividend yields, compared to fixed income securities, during years of broadly depressed interest rates in the market”, Chapel Hill Denham said.
Going into year-end, investment experts said the case for dividend yield consideration is a lot stronger in 2020.
This is given that yields on fixed income securities are at the lowest levels in the past 10 years, as the yields on 10-year bond and 1-year T-bills current stand at 9.0% and 2.7% respectively.
Chapel Hill Denham highlight that the estimate for financial year 2020 dividend yields of UBA is 16.5%, Zenith – 16.5%, Dangote Sugar (DSR) – 11.9%, GTB – 11.4%, Lafarge – 11.2%, and Access – 9.5% are materially ahead of the 9.0% and 2.7% yields on the 10-year bond and 1-year T-bills respectively.
The firm said, “Other high conviction names we believe investors should be buying for strong dividend yields are Dangcem, Stanbic, MTNN, Airtel, and Seplat”.
Analysts explained that pay-out ratios of some of the companies in its coverage are also on the rise, leading to higher dividend expectations as earnings grow, particularly in financial year 2021.
For the non-banks, Chapel Hill Denham said MTNN for instance paid higher interim dividends (+18.6% year on year) with the pay-out ratio rising to 75% from 60%.
“We believe financial year 2020 pay-out ratio will print at about 80%”, the firm projected.
Analysts said that financial year 2020 pay-out ratios of Nestlé and NB Plc are expected at 100%.
Meanwhile Airtel is expected to keep to its 80% pay-out ratio guidance by management for as long as leverage (net debt/EBITDA) stays in the 2.0x-2.5x.
It however noted that pay-out ratios of the cement manufacturers are exceptionally high Dangcem – 136% and Lafarge – 188%, based on last twelve months (LTM) dividends.
“For the banks, we are less upbeat, considering capital adequacy requirements.
“Nevertheless, we note some slight increases in the pay-out ratios of Stanbic (to 42% from 35%), UBA (to 38% from 37%), and Access (to 24% from 15%)”, analysts explained.
Chapel Hill Denham stated that the valuations of the high dividend yield stocks are cheap, presenting attractive entry/re-entry points.
Among the banks, based on 2020 return on average equity (ROAE), the 12-month target prices of ₦33.55, ₦9.77, ₦37.50, and ₦8.29 for Zenith (Price to Book (P/B): 0.54x, ROAE: 21.3%);
Access (P/B: 0.33x, ROAE: 15.1%), GTB (P/B: 1.08x, ROAE: 26.7%), and UBA (P/B: 0.34x, ROAE: 14.4%), point to strong upsides of 97%, 55%, 47%, and 37% respectively.
Furthermore, the firm stated that Access Bank is trading close to its year to date (YTD) low P/B of 0.31x.
Meanwhile, UBA is closer to its year to date trough (pattern developed by price actions) P/B of 0.26x than its YTD peak of 0.53x,
Meanwhile both Zenith and GTB are around the mid-points of their troughs of 0.36x and 0.73x and peaks of 0.76x and 1.49x respectively.
“From YTD high perspective, Access has the highest upside of 84% for a re-rating to its YTD high of ₦11.60.
UBA has 47%, Zenith – 34% and GTB – 33% with respect to being re-rated to their YTD highs.
Stanbic is nearing its YTD high of ₦42.50, being only 9% away, but the trading at 1.24x P/B indicates a sizable potential to be re-rated to its YTD high P/B of 1.51x.
“We continue to like the stock on strong business fundamentals with our 12-month target price of ₦42.69 and financial year ROAE of 21.4%”, Chapel Hill stated.
The firm said for the non-banks, at 4.74x, MTNN is trading close to the mid-point of its YTD high and low enterprise value to earnings before interest tax, depreciation and amortisation (EV/EBITDA) with its 12-month target price of ₦180.00 indicating an upside potential of 45%.
For Seplat, Chapel Hill Denham estimated target price of ₦500.89, with 25% upside, Lafarge is price target was set at ₦31.11, with 136% upside and Dangcem ₦189.67, and 41% upside.
Analysts said these stock also have attractive entry points considering that they are trading at EV/EBITDA of 2.98x, 2.47x, and 5.5x compared to the YTD peaks of 8.10x, 4.75x, and 8.42x respectively.
Analysts estimated Dangote Sugar’s price target at ₦16.77, which indicates a 38% upside, with EV/EBITDA of 4.15x is heading towards its YTD high of 4.44x.
“But we see the 24% gap between the current price and the YTD peak as attractive”, analysts explained.
Chapel Hill Denham however noted that trading at EV/EBITDA of 4.50x, Airtel is now only 1% away from its YTD high price of ₦382.00 with an implied EV/EBITDA of 4.51x, but the valuation is below MTNN’s at EV/EBITDA of 4.74x.
Analysts stated that the broad market rebound, which started in Q2-20 has been sustained with the NSE ASI returning 6.2% Q3-20 to date.
Notably, at 25,987.14, the NSE ASI is now around 26,000 point, a level last seen in early March 2020 before the announcement of COVID-19 induced lockdowns.
“We believe the low interest rate environment, in addition to the reopening of the economy, is a catalyst for the stock market in Q4-20”, the firm stated.
Although dollar illiquidity persists, analysts think the CBN is buying time for further crude oil price recovery and optimistic of improved liquidity over Q4-20.
However, Chapel Hill Denham said this may come with further devaluation of the local currency, naira.
“We note that global companies that have not been able to repatriate dividends, due to low USD liquidity in the FX market, are partly utilising same to increase their stakes in the Nigerian subsidiaries.
“Heineken and Nestle are major examples in this case and we believe they are on the forefront of receiving higher dividends in future”, Chapel Hill Denham explained.
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Low Interest Rate: CHD Advises Investors on High Dividend Yield Stocks
