By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

01 February 2015

I got many requests asking me to recommend which of the two oil companies readers should invest in. Unfortunately, I cannot do that because there isn’t enough room in a 500-word article to go through all the factors. Furthermore, you’d have to pay me 2 per cent of the sum you’re investing upfront and 20 per cent of any gains that you make every year!

Nonetheless, there are two ways in which you can make money from investments in the stock market. These are from dividend payouts and from capital appreciation when the market price goes up. So, before you start putting in your money, you have to decide which you want.

For the two companies featured last week, Total Kenya and KenolKobil, the dividends paid in respect of 2013 profits were: Sh0.60 (60 cents) and Sh0.10 (10 cents) per share, respectively.

The market value of these shares are Sh27 (Total) and Sh9 (KenolKobil). So, the percentage return in the form of dividends is 2.2 per cent and 1.1 per cent respectively.

The other way of making money from investment in shares is through price appreciation. The price of a share is determined by the dynamics of supply and demand. If demand is higher than supply, the price is likely to move up. The reverse is also true.

The factors that influence demand and supply for a particular share are as many as there are investors, stockbrokers, speculators, comentators and spectators combined! It’s a minefield out there.

Still, it would be important to track the movement of the prices of the two companies under consideration. In January 2010 (five years ago), Total Kenya Limited was trading at Sh29.25; today, it is going for Sh26.50 – a drop of Sh2.75, or 9.4 per cent. KenolKobil started the year 2010 at a price of Sh56 and is now trading at Sh9.2 – an 84 per cent decrease!

But hold your horses: something interesting happened to KenoKobil in June 2010: The shares were split by a ratio of one-to-ten. In other words, every share was divided into 10 new smaller ones. So, the price of Sh9.20 we are seeing today is equivalent to Sh92 when we factor in the subdivision.

So the reality is that the market value of a KenoKobil share has increased from Sh56 to Sh92 in the last five years – a growth of Sh36, or 64 per cent. Over the same duration, the company has paid out Sh14.25 in dividends. This about 25 per cent of the January 2010 price.

For it’s part, Total Kenya has paid out Sh2.60 over the same period. So how does one explain the fact that this company’s share is more expensive than that of KenolKobil? That is a question for another day.

Finally, I must give another caution: past performance is not an indicator of the future! Mpanda ngazi hushuka; a share whose price has been rising in the past can drop. My aim here was to show how one can make money from stocks.