Kenya’s Dividend Dynamos: Four Stocks Yielding 10%

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.

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.

Photo by Travis S.

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%.

Conclusion

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!

Further Reading

How to Invest in Kenyan Stocks

Three Innovative (and Profitable) Kenyan Banks

Investing in Ghana’s Booming Banks

Disclosure: I do not own shares of any stock mentioned in this post.

Three Innovative (and Profitable) Kenyan Banks

This guest post is by Michael Abrahams, General Partner of the New Markets Financial Fund, L.P.

While Kenya’s safari and ecotours remain more popular, banking tours may soon catch up. I’ve just returned from a self-guided tour of that country’s banks and came away impressed by the innovation, social impact, and profitability of banking the un- and underbanked there.

In Nairobi, I met with both commercial banks and non-profit microfinance institutions. The companies included:

  • Equity Bank (EQBNK:KN), a global leader in banking the unbanked with creativity and innovation. At its launch, Equity’s management focused on answering a simple question: How can we lower the consumers’ cost of entry to banking? While the bank now has a broader ranger of offerings, with some strength in SME lending, 60% of new customers are still from the ranks of the unbanked. Now with 6.7 million customers, the bank has cut costs and improved access by offering a low cost, flexible back office system and a focus on mobile phone banking, whose costs are approximately a tenth the cost of a branch-originated transaction. Equity has also developed a low-cost agency system to serve customers in rural areas. These agents are self-employed individuals (often operating out of their own retail stores) who are trained to provide Equity’s basic banking services, particularly in deposit-taking and small balance lending.
Photo by WhiteAfrican
  • Family Bank is a company founded in 1984 expressly to serve the underbanked. Although their average deposit is only $200, Family has $160 million in deposits and 61 branches. The company is not yet listed but expects to debut on the Nairobi Stock Exchange shortly.
  • Co-op Bank (COOP:KN) was established in 1965 by tea, coffee and sisal farmers whose cooperative savings groups could not obtain banking services. Cooperatives are widespread in Kenya, and much of Africa, and they remain about 20% of the bank’s business. The bank has an active consultancy devoted to helping in the formation of new cooperatives as well as assisting existing co-ops flourish.

How profitable are these banks? Very. The two publicly traded banks, Equity and Co-op, have returns on equity exceeding 25% and show growth in both loans and earnings per share in excess of 40% annually. Family Bank, not yet publicly traded, is not quite as profitable as the other two banks or showing as rapid growth through year-end 2010 but is still doing very well.

Perhaps the most revolutionary banking product in decades is M-Pesa, transaction banking through simple 2-G mobile phones, which has spread like wildfire in Kenya. Following the introduction of M-Pesa by the mobile provider Safaricom (SAFCOM:KN) in March 2007, it is now utilized by 14.9 million people, or 65% to 70% of the adult population.

And this is not the very limited mobile banking service found in the US, but a full range of transaction services, including the purchase of goods and services, remittances, and bill-pay. For M-Pesa customers who link their phone to a bank, particularly the three above, a full banking platform is available including interest-bearing savings accounts and credit.

Innovation is not limited to cell phone banking. Seventy percent of Kenya’s 41 million people work in agriculture, typically very small-scale farming. Historically, banks have lent little to this sector because of its high risks, in part due to the highly volatile nature of crop production and prices.

Currently, Equity, Co-op and Family Bank are testing the use of index-based crop insurance, a low-cost insurance that will provide farmers a payout should total rainfall come in below some threshold level. This insurance, sometimes combined with forward purchase agreements for farmers’ crops by large financially sound buyers, will substantially reduce risks to borrowers and lenders, permitting an expansion of credit to this large sector.

New developments in mortgage lending are permitting lower income borrowers to build a roof over their heads. We met with Select Africa, a subsidiary of African Alliance, a leading pan-African securities firm, who provide incremental mortgages to their customers. Incremental mortgages are structured to safely and soundly meet the repayment abilities of lower income consumers.

The poor in much of Africa often build a home over years, first acquiring land, then building one room at a time with much of the labor provided by the owner. Now, some lenders are financing each stage, with each loan maturing in about two years and a new loan being granted only after the first is paid off. For example, a borrower may borrow enough to build the framing and roof, payoff that loan over time and then take out a new loan to finance the construction of outer walls. While it may take some years to finish the home, the financing never becomes overwhelming to the borrower. The loans may be as small as US$800 or as large as US$3,500. In addition, only days ago, Equity Bank announced their partnership with a Kenyan building supply company. Equity Bank will provide micro-mortgages to enable borrowers to purchase building construction materials for as little as US$2,000.

I left Kenya very encouraged by the financial institutions I had met. Unlike banking in much of the US and Europe, financial institutions are designing and introducing products that meet the needs of their customer base. Because so much of that potential customer base has been un- and underbanked to date and because that base is so large, the banks are having a huge positive social impact and have tremendous growth potential. It is really impressive to see what banking can be.

[Editor’s Note: Read more about Mike Abrahams’ approach to investing in Africa’s banks in this interview.]

Related Reading

Kenya: A Bonanza for Bank Investors

How to Invest in Kenyan Stocks




Back in June, we looked at ways to invest on the Johannesburg Stock Exchange through US discount brokers. Some intrepid readers may now be wondering how to buy shares on Africa’s smaller stock markets.

Samuel Gichohi is a Senior Research Analyst at NIC Securities, a division of Kenya’s NIC Bank (NICB:KN). He generously agreed to help us navigate the process of opening a Kenyan brokerage account and to share his views on the best bargains currently on offer at the Nairobi Stock Exchange.

The Nairobi Stock Exchange hasn’t been a great performer the past few years. Why should investors be investing in Kenya now?

Samuel Gichohi: The Nairobi Stock Exchange (NSE) is currently a buyer’s market which presents foreign investors with massive bargain opportunities. This situation is a result of various factors that have converged to push stock prices to levels that are out of whack with the fundamentals on the ground.

Samuel Gichohi, Senior Research Analyst at NIC Securities
Samuel Gichohi, Senior Research Analyst at NIC Securities

These factors include a weakening currency (which has finally begun to stabilize), escalating fuel prices, a surge in local liquidity prompted by heavy bank lending to the private sector, and food inflation caused by the region’s persistent drought. The situation was further compounded by increased political uncertainty due to the MENA crisis and the trials at the Hague of individuals suspected of instigating violence in Kenya following the 2007 election.

As a result, despite healthy turnover levels, stock prices have suffered over the last six months. Only 13 out of 48 active stocks trade above their year-end levels.

But financial results for the 2010 fiscal year indicate that listed firms — especially the financial sector companies – enjoyed explosive bottom line growth. This trend continued in the first and second quarter of this year, which indicates that economic growth is still on course.

Considering that a majority of stocks currently trade at P/E ratios below their respective sector P/E ratios, and that 15 of the 29 largest-cap companies offer dividend yields above 3%, there is an obvious mismatch between stock prices and company fundamentals. This is bound to correct going forward.

In my view, the NSE is an ideal frontier market. It offers foreign investors exposure to the Kenyan economy, and — because many listed firms have expanded beyond Kenya’s borders — it also serves as an entry point to the regional economy. In the short term, foreign investors can capitalize by investing in the weak shilling and seek exit points as it strengthens against the US dollar.

Let’s suppose I am a US-based investor and want to buy shares of a Kenyan stock. How would I do so? Can you walk me through the account-opening process?

SG: The investor would need to open an account with a local stockbroker who will in turn open a Central Depository and Settlement Corporation (CDSC) account for them. The CDSC account is where all tradable shares are held electronically.

Account opening forms are typically available on stockbrokers’ websites. The potential investor would first fill the forms and attach scanned copies of a recent passport-size photo, a certified copy of their driver’s license or passport, and a certified copy of a tax return or utility bill. After the broker receives the documentation the investor’s account will be activated and details will be communicated to them within one business day. At NIC, we suggest that the documents be scanned and emailed to us. The originals can follow later.

How would I, as a US-based investor, place a buy or sell order through NIC Securities? Do I just send you an email?

SG: If the investor would like to place buy and sell orders by email, they can complete the email indemnity form and submit a one-off processing fee of KES200 (USD 2.30).

Otherwise, the investor can communicate their order to us and arrangements can be made to accommodate them as long as adequate security measures to facilitate proper identification are in place.

What expenses are incurred when trading Kenyan stocks? Can you give me a breakdown of the commission and fees?

SG: The Capital Markets Authority (CMA) regulated commissions for trades below KES100,000 (USD1,111) is 2.1% and 1.85% for trades above that amount. At NIC, lower commissions are negotiable depending on deal sizes.

Do most Kenyan brokers have minimum amounts required to open a trading account? To place a trade?

SG: At NIC Securities, opening a CDSC account is free and the minimum trade size is 100 shares of any counter. We, however, pride ourselves on having the capacity to handle very large trade sizes with very low turnaround times.

How are dividends delivered to foreign investors? Can they be deposited into my trading account?

SG: Dividends cannot be deposited into a trading account. This is a market regulation. However, dividends can be deposited directly into the client’s bank account and arrangements can be made to reinvest the funds from there.

Must an investor have a Kenyan bank account to collect dividends? Or can they be wired to a US bank account?

SG: When opening a CDSC account the investor is required to indicate their dividend disposal preference which could also be to have the money wired to their foreign account. The concern for the investor would be that they would have to bear the cost for the electronic funds transfer. Having a local holding account to allow the dividends to accumulate before being wired to the foreign account would be a good idea. Most local banks have dollar denominated accounts and these can also be used to hold the dividends to take advantage of currency fluctuations.

What sort of account reporting can an investor expect to receive? Do brokers send a monthly statement of my cash and stock holdings?

SG: Brokers provide periodic and ‘on demand’ statements which show the securities that an investor holds with that particular broker at any point in time. Total portfolio holdings (which can be held through more than one broker) will be sent via email to the investor by the CDSC every six months for dormant accounts, and at the end of any month in which there is any trading activity on the account.

A couple Kenyan stockbrokers failed recently, are there now safeguards in place to protect investors and prevent similar events from happening again?

SG: A number of market reforms have taken place recently in an effort to protect investors’ funds. They have resulted in the introduction of an automated trading system, more stringent capitalization and disclosure requirements, the adoption of a standard stockbrokerage platform, and the eventual demutualization of the NSE.

The minimum capitalization requirement has resulted in most of the smaller brokerage firms being acquired by banks. Investment banks which have not reached the KES250 Million capital threshold have been relegated to stock brokerage status, which requires a minimum capitalization of KES50 million.

The government plans to increase the investor compensation fund and investors are being educated on how to identify and report fraudulent behavior.

What is your favorite Kenyan stock right now?

SG: I have three favorites.

First is Scangroup (SCAN:KN). It is East Africa’s largest advertising holding company with an 80% market share. It faces no local competition, which enhances its ability to attract and retain the region’s best talent. Being a listed company means it can also retain its top employees through stock options. In a human-capital intensive field such as advertising, this is extremely important.

The company’s 2010 results were affected by costs related to its acquisition of Ogilvy East Africa, a former competitor. We expect the merger to result in cost advantages going forward. We’re also bullish on the company because competition in East Africa’s banking and telecoms industries is heating up. This will ensure higher ad-spends and thus more revenues for Scangroup. We expect annual profit growth north of 20% this year. It currently sells at a PE of 20, but we consider it undervalued because of growth opportunities.

My second pick is Equity Bank (EQBNK:KN). It is the fastest-growing bank in Kenya and boasts a market share of deposits that has grown from 1.7% in 2005 to 6.2% in 2009. The deposit growth has been driven by branch expansion — particularly in Kenya’s rural areas – and by mobile phone banking.

Equity Bank caters primarily to the SME and lower income segment with most loans being below KES100,000.
This “banking the unbanked” model has yielded impressive results, evidenced by deposit growth of 44% during the first half of this year.

Equity has also done an admirable job at containing costs and maintaining the quality of its loan book. Both of these factors should lead to improved margins.

Finally, for the income investor, I like KenolKobil (KNOC:KN), a downstream oil marketer with a skillful and motivated management team. The company is focused on growing its storage capacity and distributional efficiencies, which is imperative for survival in the Sub-Saharan African fuel-marketing industry. As competition increases and margins decline, the company will be able to take advantage of its scale economies.

I also like that it is well diversified both geographically and in terms of its product range. The company has a heavy presence with over 400 service stations in East and Central Africa as well as Southern Africa.

All this is backed by the additional effect of increasing property prices that could lead to significant profits when the company disposes of some of its non-core assets.

The company is currently selling at a historical P/E of 10 and a half-year dividend yield of 5%. At the current price, the full year dividend yield will be approximately 10%; with profit growth, and a dividend pay-out ratio of 40-45%, the company is a cash cow.

Do you have questions on how to invest on the Nairobi Stock Exchange? If you do, share them in the comments.

Further Reading:

How to Invest on the Zimbabwe Stock Exchange
How to Invest on the Nigerian Stock Exchange