FBN Holdings (FBNH) released its 2014 FY results showing profits rose 17% to N82billion compared to N70.6billion a year ago. The bank however surprised many by proposing a meagre dividend per share of 10 kobo and bonus issue of 1 for every 10.
By paying 10 kobo the bank is essentially paying out just 3.9% of its earnings per share of 255 kobo. In trying to assuage shareholders the bank claimed the cash dividend and script (bonus issue) represents a N1.05 dividend and a 10% dividend yield.
Whilst that in a way is true, one still needs to wonder why cash dividend payment was very small considering that bonus issues increase the number of shares that have claims to earnings. A look at the results reveals perhaps why this happened.
Holdco model
When Holdco’s release results they include group profits as well as the company’s results. However, unlike regular structured companies who release group results, focus also has to be on the Holdco’s (company) side of the results. This is because Holdco’s are mostly shell companies with no significant operations and income streams. They only make money from dividends declared by their subsidiaries. Therefore as shareholders of the Holdco, you only earn dividends if the subsidiaries pay dividends to the Holdco and the Holdco correspondingly declares dividends.
How it affects FBNH
A look at FBNH results suggest the company only reported a profit of N5.8billion compared to the N70.6billion it declared a year earlier. Earnings per share was therefore 17kobo compared to N2.166 a year earlier. To understand why profits dropped this much, a look at the Dividend Income line for the company explains why. FBNH only received N13.7billion in dividend income from its subsidiaries compared to N74billion a year earlier. This is perhaps because the subsidiaries for whatever reasons did not pay the parent any dividends.
Why that happened
A look at the bank’s notes suggest a worrying sign. The Bank has a 16.7% Basel 2 CAR (Banking group) of just 16.7% (Dec 2013: 13.6%) just 1.67% higher than 15% acceptable by the CBN. This puts the bank at risk at defaulting and as such paying further cash dividends could just see them fall below the 15% band. There could also be other reasons such as excess dividend tax considerations (even thought the bank and other Holdcos have an exception).
FBNH going forward
For shareholders of the bank one can begin to prepare for a capital raising exercise by the bank. They will surely want to raise equity or quasi equity to help shore up their capital adequacy ratio (CAR). Not doing that will mean the bank has to rely on profits this quarter and the next to push it further away from the default line of 15%.
Disclosure – Nairametrics and the author of this article owns shares in FBNH and does not plan to buy shares in FBNH in the next one week. The author of this article wrote it themselves, and did not write this article on behalf of FBNH, its associates or representatives. The article is purely their opinion.
Dear Ugo,
The analysis is ok but must they give Bonus, when they knew fully well their outstanding shares is very Large?.
Must they give dividend at all,when they knew they need more money?.
Well that’s nigeria mentality for you.
Let’s watch and see.
If FBNH decide not to give any dividend at all like u said, then they will loose investors confidence and find it very hard to raise additional financing from investors in the future
I agree with Uyi. FBNH didn’t need to declare a bonus considering that the implication is ‘extra mouths to feed in the future’. It also probably did not need to declare a dividend since it needs to manage its CAR level.
I think the company struggled with market perception in reaching its decision. It’s share price has experienced a sharp decline in the last six months and the reaction of the market to a non-declaration of returns to shareholders (dividend or bonus) wouldn’t have helped matters.
For the long term, I think FBNH remains a good buy as it gets a better handle of the Holding company model.