This interesting article on Thisday suggest Nigerian banks may not be paying as much dividends as one will expect due to the need to grow their capital base particularly retained earnings. The argument was put foward in a report by CSL Stockbrokers.
Companies typically grow their capital (equity) either via new issues or from retained earnings. Retained earnings is the amount that is left from profits after dividend payments. an excerpt from the article reads;
“The key metric is how quickly banks can internally grow capital bases, that is, how quickly they can replenish equity capital with retained earnings. The weighted Returns on Average Equity (RoAE) of the five banks were 24.5 per cent in 2012; 20 per cent in 2013; and we forecast 19.3 per cent in 2014e.
“However, after paying dividends, the weighted average rates at which equity capital was retained were 13.8 per cent in 2012, 9.8 per cent in 2013, and we forecast 9.2 per cent in 2014 estimates.
“Growth in equity is not keeping up with customer loans and risk-weighted assets, and this is reducing CARs, in some cases to critical levels,” the report argued
The compelling argument for this is that for banks to meet up with Capital adjustment to ratios going forward it needs to either raise new equity or retain more profits which hurts dividend payments.
It’s an angle I completely agree with and one that I’m not at all indisposed to. What do you prefer, more dividend or more organic growth for the company? The dividend irrelevant theory suggest it doesn’t matter whether a company pays dividend at all as shareholders get compensated with an increase in book value per share. That off course depends on a lot factors like whether the company will be able to generate a higher return with the retained profits than if it had paid it out as dividends.
You can follow the link below to get the full article.