I’m a big fan of stocks that reward shareholders with generous dividends. They tend to be less volatile than their low-yielding peers, and a tradition of big payouts forces management teams to allocate resources carefully.
So I always look for fat dividend yields when perusing the price sheets of African stock markets. And the Nairobi Securities Exchange seems to teem with them these days.
Kenya’s stock market has dropped nearly 20% over the past 12 months due, in part, to concerns about the upcoming presidential election, which is slated for late this year or early next. But as the Kenyan shilling stabilizes and optimism over the country’s near-term political stability rises, investors have begun to take note. We may be wise to do the same.
Before diving in headfirst, however, income investors should be sure to note a couple peculiarities about collecting dividends from Kenya.
First, the Kenyan government levies a 5% withholding tax on dividends paid to residents of the country and a 10% tax on dividends paid to non-residents. So, expect actual payments to be less than the stated dividend. U.S. investors, be aware that you can claim a foreign tax credit for tax withheld by the Kenyan government.
Second, prospective foreign investors should keep in mind that dividends from Kenyan stocks can’t be directly deposited into a Kenyan brokerage account. Instead, they must either be deposited into a local bank account or wired directly into a foreign bank account. The latter option will likely prove too costly for all but the biggest investors. Ask your local broker for advice on how to open a Kenyan bank account for the purpose of collecting dividends.
With those caveats considered, let’s take a look at a few of Kenya’s dividend giants.
Barclays Bank of Kenya (Dividend Yield: 10.9%)
One of the Nairobi Securities Exchange’s blue chips, Barclays Bank of Kenya (BCBL:KN) boasts a 90-year history and operates 117 branches throughout the country. Its growth potential is limited to Kenya, however, because it is a subsidiary of the multinational Barclays Group, which operates in neighboring Tanzania and Uganda.
BBK announced a special dividend for the second straight year upon release of its 2011 annual results. The payout for the year totaled KES1.50 per share, but the bank’s 2011 earnings were only KES1.49 per share. So, with a payout ratio north of 100%, investors should be questioning the sustainability of such generosity.
I’m inclined to believe that management will make sure to at least match the 2011 dividend this year. Annualized earnings growth over the past five years is 12.4% and the company has not reduced its dividend payout since 2002.
East African Cables (Dividend Yield: 9.7%)
East African Cables (EACL:KN) makes cables. Lots of different kinds of cables. Its four factories in Kenya, DRC, and Tanzania produce cables for everything from lighting to electricity transmission to telecommunications. Swings in global metal prices (e.g. copper and aluminum) can make a major impact on the company’s results. The East African region’s severe electricity shortages and burgeoning internet demand, however, should ensure that EAC’s fortunes remain respectable, if not electrifying.
In July, management decided to pay out a mid-year dividend for the first time since 2006. When added to the previous year’s final payout, total dividends paid over the past 12 months equal KES.1.10. That represents roughly 60% of trailing 12-month earnings – a seemingly sustainable payout.
Mumias Sugar (Dividend Yield: 10.3%)
Mumias (MSUG:KN) produces more sugar than any other Kenyan plantation and controls 60% of the market. Due to the somewhat volatile nature of sugar prices, the company is in the midst of a diversification drive. It now produces enough electricity from burning crop residue to supply its own operations and to deliver 26MW to the national grid. Later this year, it will open an ethanol distillery and a water bottling plant. Management expects both projects to make positive contributions to net income from the get-go.
The company paid a KES0.50 per share dividend at the end of its 2011 fiscal year. If management maintains this payout for 2012, investors can lock in a 10.3% dividend yield at today’s stock price.
Williamson Tea Kenya (Dividend Yield: 20.8%)
Williamson (GWKL:KN) is one of Kenya’s largest tea plantations. It produces a range of specialty, fair trade teas for sale in the United Kingdom and elsewhere around the globe. High tea prices over the past few years have propelled the company’s earnings to record highs.
In spite of WTK’s soaring profitability, however, management stubbornly refused to increase the company’s dividend at a commensurate rate. But when the company sold a 50% stake in a valuable piece of Nairobi real estate last year, half-year earnings surged 76%, and the company’s board finally decided to cut shareholders in on the action by declaring a special KES50.00 dividend payable to shareholders of record as of March 12. The special payout gives the stock a trailing 12-month dividend yield of 20.8%.
I believe all four of these stocks possess the earnings power to reward dividend investors over the near to medium term. They each exhibit, to varying degrees, growth potential and a commitment to sharing that growth with shareholders.
Do you have a favorite dividend stock? If so, let us know in the comments!
Disclosure: I do not own shares of any stock mentioned in this post.