Stash Cash Before Investing in Shares

Reader Tunde writes:

Dear Ryan,

I am a 22-year-old graduate from a polytechnic in Nigeria with a diploma in business administration and management.

I’m from a poor background but have had dreams of a great future since I was a young boy.

Can you help me invest in the stock market? I would welcome any tips you may have.

Thank you,
Tunde

Reader Tunde writes:

Dear Ryan,

I am a 22-year-old graduate from a polytechnic in Nigeria with a diploma in business administration and management.

I’m from a poor background but have had dreams of a great future since I was a young boy.

So, to help make those dreams come true, I want to invest. My job at a cocoa store pays me 300 naira per day, and, for the past few months, I’ve saved 100 naira every day. I have now accumulated 12,000 naira in total.

I live with my mum and brothers and sisters and don’t have any debt. I would like to invest my savings for the next 6-8 years until I have enough to capital to start my own food-processing business.

Can you help me invest in the stock market? I would welcome any tips you may have

Thanks,
Tunde from Nigeria

***

Hi Tunde,

You are an all-star saver. It’s not easy to put aside money every day, especially as a recent graduate, yet you’re saving 33% of your income. That’s a fantastic rate!

You’ve also managed to stay free of debt, which will be a huge help to meeting your goals.

So, let’s consider your next financial moves.

When African stock markets are performing like they have over the past year, the temptation is to jump into the market head-first. After all, you don’t want to miss out on the great returns, right?

But never forget that stocks are risky investments – especially over the short-term. Just because the market has gained 33% this year doesn’t mean it will do the same next year. The Nigerian Stock Exchange lost almost 70% of its value in less than a year back in 2008. No one can promise with 100% certainty that it won’t do the same again next year.

Therefore, in order to save a lot of tears and frustration, here are three things to do before you contact a stockbroker and invest your hard-earned cash.

Photo: Quiquemendizabal
Photo: Quiquemendizabal
1) Open a savings account

You’ve built up a nice, little wad of cash over the past few months. Now you need a safe place to keep it.

If you haven’t done so already, deposit this money in a savings account at a local bank. That way, it will be readily available if you need it, but it won’t be sitting in your pocket or under your mattress where it will be tempting to spend on inessential stuff.

Open the account at a bank with a branch located conveniently near your home. You don’t want to waste an entire afternoon traveling across town just to do your banking.

If there are a number of banks nearby, shop around for a savings account. Base your decision on a combination of the following three things:

  • Interest rates – The higher the better. You want every kobo you own to be working as hard as it can for you.
  • Fees – The lower the better. Some banks may charge fees to open a savings account, to maintain it, or per transaction. Ideally, you will find a bank that doesn’t charge anything.
  • Accessibility – Most banks offer term accounts that offer higher interest rates in exchange for a commitment not to withdraw the money for a certain length of time. These accounts can have their place, but at this point, you need an account that will allow you to withdraw money at any time without penalty.

Here’s some more information about savings accounts at a variety of Nigerian banks:

Access Bank
Diamond Bank

First Bank of Nigeria

Guaranty Trust Bank
United Bank for Africa

2) Build an emergency fund

Now that you have a safe place for your money, it’s time to build an emergency fund.

Make a list of all your monthly expenses. Write down the amount you spend on the essentials — everything that keeps you and your family clothed, housed, and fed throughout a given month. This might include things like rent, food, transportation, electricity, and mobile fees.

Add up the monthly cost of all of these necessities and then multiply that number by six. Write this number down and post it in a place where you will see it every day. This is the amount of money that you should save in case you lose your income. That way, if you lose your job at the cocoa store or fall sick or experience some other misfortune, you will have six months worth of savings to live on while you recover.

3) Save for major purchases you must make within the next five years

After you’ve saved up a comfy emergency fund, it’s time to gaze into the future.

Take a few minutes to list any big purchases that you must make in the next five years. Will you need to go back to school? Buy a vehicle? Get married?

If you answer “yes” to any of these questions, then you should continue to save enough money to cover the cost. Why? Because the stock market is not in the business of guarantees. It can make you wealthy, but it can also leave you with less than you started with. You don’t want a stock market downturn to get in the way of your short-term goals

Learn while you save

The time that it will take for you to complete the steps above is an ideal amount of time to learn the basics of investing in shares. The Story of Boniface is one place to start.

Happy saving, Tunde! And please don’t hesitate to follow up with any questions on the above.

Warmly,
Ryan

Your Turn

Have I forgotten anything? What advice would you give a young person who’s considering investing in shares for the first time?

Related Reading

How to Invest on the Nigerian Stock Exchange

Kenya’s Dividend Kings: Two Stocks for Income Investors

It’s tough to beat a company that pays out a regular dividend.

They generate income for shareholders. They typically boast sharp management teams. And, historically, their shares have outperformed their non-dividend-paying counterparts.

The Nairobi Securities Exchange is chock full of dividend stocks. Almost all companies listed on the market presently pay a dividend.

But not all dividend stocks are created equal. Some don’t yield much in relation to their price. Others pay out so much of their earnings that it hampers their future growth. And some disappoint shareholders with frequent dividend cuts.

So, which Kenyan stocks offer the most substantial, reliable, and growing income stream?

Let’s take a closer look.

It’s tough to beat a company that pays out a regular dividend.

They generate income for shareholders. They typically boast sharp management teams. And, historically, their shares have outperformed their non-dividend-paying counterparts.

The Nairobi Securities Exchange is chock full of dividend stocks. Almost all companies listed on the market presently pay a dividend.

But not all dividend stocks are created equal. Some don’t yield much in relation to their price. Others pay out so much of their earnings that it hampers their future growth. And some disappoint shareholders with frequent dividend cuts.

So, which Kenyan stocks offer the most substantial, reliable, and growing income stream?

Let’s take a closer look.

1. High Yield

We’re going to start by looking at dividend yields. This is simply the most recent 12 months worth of dividends divided by its share price.

Dividend Yield = Dividend per share over preceding 12 months ÷ Current share price

So, a dividend yield is a bit like the yield of a bond, but unlike bond payments, dividends can (and should) grow as years go by.

Here are some of the highest-yielding Kenyan stocks:

[table id=179 /]

2. Payout Ratio

A great yield is nice but if a company can’t afford to continue paying it when times get tough the value of the stock is less than it might seem at first glance.

The payout ratio is one way to measure the security of a dividend. It shows us what percentage of earnings a company pays to shareholders in the form of dividends and how much it keeps for a rainy day or to re-invest back into the business.

To calculate it, we simply divide dividends per share by earnings per share.

Payout Ratio = Dividends per share ÷ Earnings per share

The lower the ratio, the more likely it will be for the company to continue paying the dividend at the same level or higher. A high payout ratio, on the other hand, may indicate a dividend in danger of being cut.

The chart below shows the current payout ratios for Kenya’s highest-yielding stocks.

[table id=180 /]

When I screen stocks, I typically consider a payout ratio above 60% to be a warning sign of a stagnating dividend, or potentially one in danger of being reduced. There are six stocks in the above chart with payout ratios in that territory. Let’s remove them from our list and move on to the next item on our Dividend King checklist.

Photo by Travis S.
Photo by Travis S.
3. Dividend Cuts

While the payout ratio is a fairly good indicator of a possible dividend cut, it tends to overlook companies whose policies dictate that dividends be maintained at a fixed percentage of earnings.

This is why I also like to see whether a company consistently pays a dividend and whether it has cut its dividend at any point during the most recent five years.

The chart below shows exactly this.

[table id=181 /]

Many income investors can’t abide dividend cuts, and for the purpose of this article, neither can I. Any company that has cut its dividend over the past five years (or hasn’t paid one each year) isn’t fit to be a dividend king.

4. Dividend Growth Rate

Ideally, companies will increase the size of their dividend in line with earnings growth as years go by. This can make such stocks a fantastic source of income. Suppose you bought KES10,000 worth of a stock that traded at a dividend yield of 4.00%. And suppose that stock increased its annual dividend at a rate of 15% per year for five years. At the end of those five years, the yield on your original KES10,000 investment will be equivalent to 800 shillings per year or 8.00% annually. And the value of your shares will have likely doubled, too!

The formula for calculating a dividend’s five-year growth rate is a little complicated, but I’ll write it here for you number crunchers.

Growth Rate = (Most Recent Dividend ÷ Dividend Five Years Ago)(0.2) – 1

Or you can also use this handy online calculator.

So, which Kenyan stocks pay a high, safe, and growing dividend yield? Check out this chart.

[table id=182 /]

I generally like my investments to grow at a rate of at least 15% per year. An investment with this rate of return will double in value every five years. If we use this as our hurdle rate, only two stocks make the cut – Equity Bank and KCB Bank Group. In my view, they are Kenya’s Dividend Kings.

What Do You Think?

How important are dividends to you? What criteria do you use when deciding whether to add a dividend stock to your portfolio? Let us know in the comments!

A Simple System to Stalk Super African Stocks

The stock market can be a pretty confusing, intimidating place for new investors.

With all of its charts, ratios, and jargon, it’s clear why many people choose to either hire a professional to manage their stock portfolios or to ignore stocks altogether.

Are you one of these people?

If so, I’m glad you’re here, because, today, I’m going to show you a magic formula for picking great African stocks.

The stock market can be a pretty intimidating place for new investors.

With all of its charts, ratios, and jargon, it’s clear why many people choose to either hire a professional to manage their stock portfolios or to ignore stocks altogether.

Does this sound like you?

If so, I’m glad you’re here, because, today, I’m going to show you a magic (and simple) formula for picking great African stocks.

Beating the Market with a Magic Formula

I wish I could take credit for it, but the system was actually developed by a much smarter investor than me.

Joel Greenblatt, a hedge fund investor and professor at Columbia University, first explained it in his excellent book, “The Little Book That Still Beats the Market.” It’s a great, quick read for anyone with even a passing interest in stock investing.

The formula has posted stellar results. According to research conducted by the American Association of Individual Investors, U.S. stocks selected according to the formula have outperformed the S&P 500, by an average of 7.6% per year over the past 15 years. Not too shabby, eh?

So, how does it work?

Essentially, the formula identifies profitable companies that trade at cheap prices. And it does it by using two simple ratios — the price earnings (P/E) ratio and Return on Assets (ROA).

Step 1: Calculate the P/E Ratio

The price earnings ratio (P/E ratio) is arguably the most common ratio in finance. There’s a reason for that. It’s one of the most straightforward methods to identify attractively-priced stocks.

Photo by Yathin
Photo by Yathin

Here’s how you calculate it:

P/E Ratio = Share Price ÷ Earnings Per Share

So, how do we interpret this ratio?

Well, if we are considering buying a stock, we want the share price to be low and the earnings per share to be high, correct? Of course! Because we want the most profit for the cheapest price.

Therefore, we should be on the lookout for stocks with low P/E ratios.

The chart below shows companies that trade on the Botswana Stock Exchange with their current share price and earnings per share. I’ve ordered them according to their P/E ratios (lowest to highest).

[table id=176 /]

Therefore, based on the historic P/E ratio, FSG Limited appears to be cheap and Wilderness Holdings is expensive.

Step 2: Rank the Returns On Assets

Now, let’s look at the second part of Greenblatt’s magic formula — the return on assets (ROA).

Return on assets measures profitability. It tells us how much money a company earns per every dollar’s worth of assets that it owns.

Here’s the formula:

Return on Assets = Earnings ÷ ((Assets at beginning of period + Assets at end of period) ÷ 2)

We’re simply dividing earnings by the company’s average assets. Note that we use average assets because this figure can change significantly over the course of 12 months. [You can find all the data needed to complete this calculation in the company’s most recent financial statement.]

The management of a company with a high ROA is typically making better use of the assets entrusted to it than the management of a company with a low ROA.

Moreover, companies with high ROAs will typically re-invest a portion of their profits in similarly profitable assets, creating a virtuous cycle.

Let’s take a look at how the Botswanan companies measure up according to this ratio.

[table id=177 /]

It would appear that Sechaba Breweries generates more profit per dollar (or pula) of assets  than any of the other companies here. That suggests that it can reinvest in expansion more quickly and more profitably.

Step 3: Time for Some Magic!

We’ve arrived at the final step of the magic formula. We’ve seen that, all things equal, it’s better to spend less for a dollar of earnings than more. We’ve also seen that, all things equal, its better to invest in a more profitable company than a less profitable one. So, let’s get the best of both worlds by investing in profitable companies that trade at bargain prices. To do this we simply add the P/E score to the ROA score to create a composite score for value and profitability.

[table id=178 /]

There you have it. The magic formula points us to FSG Limited, Sechaba Breweries, and Chobe Holdings as potentially market-beating stock picks.

I’ve greatly simplified Greenblatt’s magic formula here. So, if you have any interest at all in screening for stocks, I highly recommend reading “The Little Book That Still Beats the Market (Little Books. Big Profits).” It’s an easy, entertaining read that distills all you really need to know about value investing.

Let Me Hear It

Do you think FSG, Sechaba, and Chobe will be among the Botswana Stock Exchange’s best performing stocks over the 12 months? Let us know why or why not in the comments!

Related Reading

How to Invest on the Botswana Stock Exchange

10 South African Stocks Poised to Beat the Market

Ranking Kenya’s Most Efficient Banks

What Is a Stock, Really? (The Story of Boniface, Part 2)

When we last left Boniface and Mercy, they had just agreed on a business deal. Mercy and the other members of her investment club would give Boniface $10,000 for the purpose of opening a new shop in a promising location near a new textile factory.

In return, Boniface would give the club a 10% ownership stake in his business, SmileSave Supermarkets.

Let’s see how the venture fared since then.

When we last left Boniface and Mercy, they had just agreed on a business deal. Mercy and the other members of her investment club would give Boniface $10,000 for the purpose of opening a new shop in a promising location near a new textile factory.

In return, Boniface would give the club a 10% ownership stake in his business, SmileSave Supermarkets. You can read Part 1 of the story here.

Let’s see how the venture fared since then.

Growth Accelerates

Boniface wasted no time in deploying the injection of capital from the investment club. He hired builders and purchased cinder block, concrete, and corrugated iron the very next day. Within two months he had a tidy little road-side store.

The new location performed extremely well, just as Boniface had forecast. Customers filled the shop thanks to its fair prices and the variety of goods it had for sale. And, just like at the other SmileSave Supermarkets, Boniface’s employees greeted every customer warmly as they entered the store.

A Disagreement Over Dividends

Soon, the day arrived for Boniface to deliver SmileSave’s first quarterly financial report to the teachers’ investment club. He was nervous as he put on his jacket and tie. He hoped that Mercy and the others would be pleased with their investment.

Boniface and the teachers gathered in an empty classroom after the students had been dismissed. He greeted them all warmly and proceeded to detail SmileSave’s activities over the preceding three months. He told them its sales figures. Its expenses. Its assets. And its profits.

When Boniface announced that SmileSave had earned $4,000 during the quarter, Isaac, the science teacher jumped from his seat with glee.

Photo by Nchenga
Photo by Nchenga

“This is fantastic!” he exclaimed. “We will recoup our $10,000 investment in no time!”

Mercy, the math teacher, turned in her seat to face him, “But, Isaac, remember that we own just 10% of SmileSave. Boniface owns the other 90%. So, our portion of the earnings is $400 – not $4,000.”

Isaac slowly sat back down in his chair. “Hmm… $400 for the investment club. And there are 10 of us who are members of the club. That means each of us receives just $40.” The other teachers murmured.

“Not exactly,” said Boniface nervously as he cleared his throat, “SmileSave must keep most of these profits in order to grow, so I am proposing a dividend of $1000 – not $4000.”

The room fell into a stunned silence.

“But Boniface,” said Grace, the English teacher, “That means each of us in the investment club will receive a dividend of just $10.”

Boniface looked at the floor. Before he could respond, Mercy came to his rescue.

“Listen, everyone,” she said, “We knew this was not a loan. This is an investment. If we demand that all profits be returned to us in the form of dividends, SmileSave will remain small. It’s like having a flock of chickens and eating every egg that the hens lay. But if you allow some eggs to hatch, they will grow into roosters and hens, and your flock will grow.”

The other teachers looked unconvinced.

“Let me explain how I intend to grow the business,” said Boniface, “With the $3,000 of retained profits, I will begin to purchase materials to construct SmileSave Supermarket #5. I would also like to begin installing television in the shops, so that people can relax and watch English Premier league football or soap operas while eating fish and chips and drinking cold beverages.”

There was silence in the room, as the teachers considered the plan.

“Hmm… I do like fish and chips,” said Isaac as he rubbed his round belly.

“And I love to watch Manchester United,” said Grace.

“All in favor of approving the dividend?” asked Mercy.

Every teacher raised a hand.

Building the Business

As the years passed, SmileSave grew and grew. Boniface built one new store per year. Then two. Then three. He hired more employees. He bought more trucks. He even constructed a refrigerated warehouse to store his goods.

And quarter after quarter, Boniface raised the shareholders’ dividend in line with SmileSave’s growing profitability. The investment club was delighted with the performance and there was rarely any more disagreement about the size of dividends.

As the business expanded, he realized he needed more good advisors like Mercy. So, Boniface formed a Board of Directors which included an accountant, a lawyer, a banker, and (of course) Mercy.

Going Public

Word of SmileSave spread throughout the region, and every week, it seemed, someone asked Boniface how they might invest in the business, too. Just like the teachers did years before.

Meanwhile, Isaac, the science teacher was nearing retirement age. He asked Boniface if it might be possible for him to sell his stake in SmileSave so that he and his wife could build a house closer to his grandchildren.

Boniface brought both of these questions to SmileSave’s next Board of Directors meeting.

“We could simply arrange for Isaac to sell his stake to any new interested investors,” said the lawyer.

The banker and accountant nodded their heads in agreement, but Mercy just sat in her chair, munching on Weetabix, and deep in thought.

“Boniface,” she said suddenly, “are the shops selling a lot of fish and chips?”

“Indeed they are!” he replied. “It’s actually becoming a problem, because people are standing, eating fish and chips in the store while watching soap operas. The shops become very crowded. Other customers bump into them while they try to shop. But how does this pertain to this meeting’s agenda?”

Mercy looked around the table. “I think it is time for SmileSave to list on the stock exchange,” she said.

“An IPO??” asked Boniface incredulously.

Ignoring him, Mercy turned to the accountant. “How much is SmileSave worth?” she inquired.

“Roughly $500,000,” he replied.

“Good. I propose that we raise an additional $250,000 by offering shares of SmileSave to the stock market. We can use the additional funds to build fish and chips restaurants at each supermarket.”

“That’s an interesting idea,” said the lawyer. “It will allow people to easily invest in the company while allowing investors like Isaac to sell their stake.”

“Plus, the extra funds for investment in restaurants will help SmileSave grow even more quickly,” said the banker.

“After the IPO, SmileSave will be worth $750,000,” said the accountant, “We can specify that this be divided into 750,000 shares of $1.00 per piece.”

“Will I still own a majority of the company?” asked Boniface cautiously.

“Yes,” Mercy replied. “You presently own 90% of SmileSave, while the teachers’ investment club owns 10%. To determine the value of your stake, just multiply $500,000 by 90%. That’s $450,000.”

“After the IPO, the shareholding structure will look like this,” said the accountant.

  • Boniface: 450,000 shares (60% of total)
  • Teachers’ Investment Club: 50,000 shares (7% of total)
  • New public shareholders: 250,000 shares (33% of total)
  • Total: 750,000 shares (100%)

Just as he did years before, Boniface rubbed his chin. “I like this proposal, Mercy. We have ourselves a deal.”

And with that, the Board began preparations for listing on the stock market. At the Initial Public Offering (IPO), hundreds of new investors scrambled to secure shares (or stock) in the fast-growing business. Each of them now owned a little piece of each shop, truck, television, warehouse, and, most importantly profits.

And that is how SmileSave Supermarkets became a stock.

Now It’s Your Turn

After reading the story of Boniface, what questions do you have about stocks and stock markets? Let us know in the comments!

 

What Is a Stock, Really? (The Story of Boniface, Part 1)

Let me tell you a story about the entrepreneurial Boniface, his analytical friend Mercy, and how they learned first-hand why companies choose to issue stock and why investors love to invest in them.

Let me tell you a story about a man named Boniface and his good friend, Mercy, and how they learned first-hand why companies issue stock and why investors love to invest in them.

Meet the Entrepreneur

Boniface owns a small shop in his village – the SmileSave Supermarket. It’s an ambitious name, and Boniface is an ambitious man. He sells maize meal, sugar, soap, batteries, and candles. He even has a small refrigerator so that he can stock ice-cold bottles of cola and beer.

People enjoy shopping at SmileSave because the prices are reasonable, the goods are plentiful, and Boniface greets each person warmly when they enter. So, as the years go by, the shop does quite well. Boniface saves up enough of the profits to buy a small, used truck which allows him to transport a greater quantity and variety of items to sell. Soon, customers are coming from neighboring villages to shop at SmileSave.

With profits accumulating rapidly, Boniface hires workers and opens another store ten kilometers down the road and then yet another a few years later.

Then one day Boniface hears some interesting news from his friend, Mercy, a math teacher at the local high school. She tells him that a large textile factory is being built near a small village 50 kilometers away. Many people were moving to the area in the hopes of finding jobs.

Opportunity Beckons

Boniface senses opportunity. Surely, all of these people will need a place to shop when the factory opens.

Unfortunately, Boniface has next to nothing in his bank account, having just bought several solar panels to provide electricity to his stores. It would cost $10,000 to build and stock a new SmileSave Supermarket near the factory. If he waits until he has saved sufficient funds, there is a risk that some other shop-owner may discover the opportunity. He decides that he can’t afford to wait and calls his bank to request a loan.

Photo by Skip Russell
Photo by Skip Russell
Borrowing Isn’t Always a Viable Option

The banker gives him good news and bad news. The good news is that he will happily lend him $10,000. The bad news is that he will charge him an interest rate of 25% on that amount.

“Twenty-five percent!” Boniface exclaims, “That amounts to $2500 per year and will reduce my profits to almost nothing!”

The banker sympathizes but explains that he’s simply unable to offer a lower interest rate.

The Venture Capitalist

Later that same day, Mercy stops by SmileSave after school to buy her two favorite snacks: pilchards and Weetabix. She notices that Boniface is frowning over a ledger book and punching numbers into his calculator. He is so preoccupied that he forgets to even greet her when she walks through the door.

“Why the glum face, Boniface?” she asks.

After explaining his plan to open another shop near the textile factory and his frustration with the bank’s lending terms, he jokingly asks Mercy whether she might be able to lend him $10,000 at a more favorable rate.

“I’m afraid I don’t have $10,000 to lend, but I do have an idea,” Mercy replies as she pulls a pen and paper from her purse. “Tell me, Boniface, what is the price of your business?”

A Valuation Exercise

The shopkeeper makes a puzzled face. “I’m sorry, but SmileSave Supermarket is not for sale.”

“No, No. How much is SmileSave worth?”

“Ah, I understand you now,” says Boniface and puts his hand to his chin as he takes a mental inventory of his business assets. “Well, each of the three shops are sturdy buildings and located along busy paths between villages. Together, I estimate they are worth $60,000. Plus, they each contain about $5000 worth of goods and equipment. And, I also have my old truck. I’m not sure of its precise value, but my cousin offered to pay me $5000 for it last week.”

Mercy sums all the assets on the piece of paper.

  • Three SmileSave Supermarket shops ($20,000 x 3): $60,000
  • Store inventory and furnishings ($5,000 x 3): $15,000
  • Truck: $5,000
  • Intangibles: ???

“That’s a total of $80,000,” she says, “but you have forgotten to estimate the value of your intangible assets.”

“Intangible assets?”

“Indeed!” says Mercy. “You’ve built up a very loyal customer base because you offer fair prices, and your staff greets them warmly every time they walk through the door. SmileSave is becoming synonymous with good service. You’re also a great businessman, which is proven by how quickly your business has expanded. These intangible qualities are easily worth $10,000 all by themselves!”

Embarrassed, Boniface disagrees at first, but eventually concedes that his unique leadership skills are a valuable asset to SmileSave.

“Very good,” says Mercy, “we’ve estimated the fair value of your business to be $90,000.”

“That’s very interesting. But how exactly does it help me purchase supplies to build a shop near the new factory?”

“You will see soon enough,” Mercy replies while folding the list and putting it in her purse. “I must be on my way now, but I will be back to speak with you in two days time. Rest well!”

And with that she was out the door. Boniface shakes his head bemusedly and smiles. She had forgotten her pilchards and Weetabix on the counter.

A Capital Injection

Mercy was true to her word. Two days later she returned to SmileSave, greeting Boniface excitedly.

“I have a business proposal for you,” she said, as she reached in her purse and slowly counted out $1000 in $100 bills.

“Thank you very much, Mercy. That is very generous of you, but I’m afraid I need much more than that to open another SmileSave Supermarket.”

Mercy ignored him, reaching into her bag and counting out another $1000, and another, and another, until there was $10,000 in cash sitting on the counter.

“Where did you get all of this money?!” Boniface gasped.

“It was quite simple,” said Mercy. “I told the other teachers at the high school about your situation, and they were all eager to help. John, Susan, Sharon, Isaac… Ten of us altogether have formed an investment club. We each contributed $1000, because you are an honest man, and we think SmileSave is a business with great potential.”

Boniface shook his head slowly. “I am very thankful for this. But I’m not sure how quickly I can repay it. Can you accept a lower interest rate than the bank?”

“This is not a loan, Boniface,” Mercy chuckled. “We are proposing to buy a portion of your business.”

She continued, “Two days ago, you told me that SmileSave was worth a total of $90,000. With this $10,000 capital injection, the new value of the business would be $100,000. Only instead of owning 100% of SmileSave, you would own 90%. The remaining 10% would belong to me, John, Sharon, and the other teachers. We would each own a portion of each shop, each refrigerator, each solar panel, the truck, and even the intangible assets. And you would be the majority shareholder.”

“But how will you ever receive a return on your investment?” asked Boniface, perplexed.

Dividends on the Horizon

“Aha! Excellent question,” Mercy replies. “As part of the agreement, we ask that you provide us with a financial report every quarter. This will show all of SmileSave’s sales, expenses, assets, liabilities, and cash flow. You will also make a judgement each quarter as to how much of the company’s profits should be saved for future expansion. If there is any money left over, we ask that it be distributed to shareholders in an amount proportionate to their ownership stake in the business. Because you own 90% of the company, you would receive 90% of this profit. The teachers and I would receive the other 10%. This is called a dividend.”

“Very interesting,” says Boniface, “So, the better SmileSave performs, the more money you and the other teachers will earn.”

“Exactly.”

Boniface rubs his chin. “I like this proposal, Mercy. You have yourself a deal.”

“Fantastic!” exclaims Mercy. “I will run and inform the teachers that we are now part-owners of SmileSave Supermarkets. But before I go, may I please buy a can of pilchards and a package of Weetabix?”

“Of course, partner,” says Boniface, and they shake hands as she leaves SmileSave Supermarket #1.

What’s Next for SmileSave?

Will Boniface successfully expand SmileSave’s operations? Will the teachers receive a good return on their investment?  Will we ever discover why Mercy likes pilchards and Weetabix so much? Check back here on Tuesday for the exciting conclusion to “What is a Stock, Really?”

What is a Stock, Really? (The Story of Boniface, Part 2)