NEM released its 2014 FY results showing earnings per share jumped 287% to 29 kobo per share. The company also declared a dividend per share of 6 kobo. The share price has responded in kind, jumping from 66 kobo to 88 kobo per share.
This result basically made nonsense of our projections as we had earlier in January forecasted that NEM could post a loss in 2014. Rather than post a loss, the company posted a profit of about N300m and whilst we projected it will not pay dividend it proposed to pay 6 kobo per share. So why were we so wrong?
Income Statement
For NEM Q4′ 2014 was always going to be a pivotal one. We had expected a loss for the quarter relying on assumptions which we highlighted in our article. NEM did post a loss for that quarter but it was much lower than we had anticipated. NEM’s N70million loss, ensured that it kept most of the N1.5billion it reported in the first 9 months of the year. The N70 million loss was also much slower than the N1.6billion loss it reported in the same period in 2013. That alone was the reason for the huge jump in earnings per share.
But why pay dividends?
NEM declared a dividend of 6 kobo per share which if paid completely should cost the company about N316 million. That represents 21% of profits. However, a deeper look shows by paying N316 million will leave it with just N560 million in retained earnings. This is the part that beats our imagination. Agreed it made N1.5billion in profits in the subsequent 2015 Q1 results, it is still not enough reason to deplete its distributable reserve for sake of dividend payments.
Despite our deep reservations, we believe the 6 kobo dividend is a major reason for the bull ride it is enjoying. The share price has added about 22 kobo to the share price thus gaining 35% since it announced dividends. That is nearly 4 times its current dividend payment. This makes NEM a hot stock for now and could just also make it a bull trap. Be wary of profit takers if you plan to buy at this price.
Finally
NEM is one insurance company to watch in 2015, particularly on the back of its 2015 Q1 results. We have seen NEM churn out good quarterly results in the past only for it to falter towards the end. However, if they continue to grow gross premiums and reduce reinsurance cost then strong short term profits could just be around the corner.
We also hope that NEM will this year, release its results promptly and with disclosures to enable investors make informed decisions. The company incurred a fine of N10 million in 2014 and that should serve as a deterrent.
I believe the price will go higher. M&B proposed a dividend of 5k and its share price rose to over 190k before it being marked down. The issue is that the insurance sector has been underperforming in the market due to low or no dividend payout. NEM also paid 6k dividend for the 2013 financial year. Thus the price rise is more than justified. I am expecting the price to rise beyond 110k and maybe stabilize at around 120k. check the Div/MKt price ratio and you see that 5% is a good average point.
I doubt it will rise beyond this price. The return on equity for the stock is still very low