Is Safaricom’s 10cts dividend better than Equity’s 30cts?

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

31 May 2009

“Surely these guys can’t be serious! They are the most profitable company in eastern Africa; they made Sh10 billion profit after tax last year and out of that, they are paying shareholders only 10cts in dividends! To make matters worse, the shares that they sold for sh5 12 months ago are now going for Sh3 at the stock market.”

These must be the thoughts going through the minds of very many Kenyans….some 800,000 of them, in fact. Unfortunately, they are missing a few points. First of all, out of the sh10 billion profit, sh4 billion will be paid out as dividends. All shareholders will …er… share, this amount: some will get less than sh100, others a few thousand…and a few will get several billions!

Now that might sound unfair, but not so after you consider how much every person invested: some a couple of thousands and others several billions! Still, one question remains: is 10cts per share a good dividend?

To answer that, we must find out how much profit each share (and I mean share; not shareholder!) made. This is determined by dividing the total profit (sh10 billion) by the total number of shares available (40 billion). The result is 25cts .

The dividend of 10cts will be paid from the 25cts profit per share. The remaining 15cts will be retained to finance ongoing developments in the company.

It has been suggested that Safaricom shares should be consolidate because they are too many. Proponents of this argument say that every ten shares, for example, should be lumped up together to create one new larger share. If that was done, the dividend becomes “a more decent” one shilling per share.

The consolidation argument goes to say on that the value of the shares at the stock market would appreciate due to the reduced supply – the total number having been cut down from 40 billion to 4 billion.

This argument, however, does not hold any water: if you have 500 shares now, you will get sh50 in dividends. If they were consolidated at the ratio of ten-to-one as suggested, you will end up with 50 new shares.

Now, your dividend after consolidation is one shilling per share, making a total of sh50… and you are back where you started!

What about the value at the stock market? At current prices of about sh3 each, your 500 shares are worth sh1,500. Consolidate them to 50 units and the price jumps up to sh30 each…total value now becomes sh1,500. Argh!

Wouldn’t consolidation also reduce the supply? No! The cause of the depressed price at the stock market is NOT the number of shares in the company but the number of shareholders. Consolidating the shares will NOT affect the number of shareholders. Therefore even though the price will change, the total value will not.

Before leaving the matter, let’s compare Safaricom with another multi-billion company, say, Equity Bank. This bank’s profit last year was sh3.9 billion. It has 3.7 billion shares therefore the profit per share was about one shilling. From this, the bank paid 30cts in dividends, or 30 percent of the profit.

At 10cts per share, Safaricom is paying out 40 percent of its profit. Thus the phone company has done better than the bank!