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Dividends

Why Dividend Reinvestment Plan “DRIP” is a great solution for unclaimed dividends

Implementation of the Dividend Reinvestment Plan in Nigeria will add vibrancy to the stock market.

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Revenue Reserves and Dividends, Using Earnings to Select Stocks, Dividends

In a recent article by Onome Ohwovoriole published by Nairametrics, it was noted that about N129 billion is sitting idly in an unclaimed dividend account. Regrettably, efforts by the Security and Exchange Commission (SEC) through its implementation of the e-dividend program were not able to reduce the increasing accumulation of unclaimed dividends.

Since that program did not work or has not worked, it may be time to try some other ways or strategy to get the dividends into the “pockets” of their rightful owners. One strategy or method that could come handy is the implementation of dividend reinvestment plan, DRIP.

A dividend reinvestment plan is a system where the dividends received from a company whose shares you hold are automatically reinvested, usually commission free, into additional shares of the same company’s stock.

How DRIP Works

The way the system works is that an investor checks a box, when initially buying the shares of a company and by checking the box, the investor instructs the broker to reinvest whatever dividends that come from a particular share holding by buying more share of the same company, even if it means buying fractional shares, in cases of small dividends. May be an illustration will make this concept clearer.

Let us say that you invested N10,000 into AIICO Plc by buying 10,000 shares when the price was N1 per share and you elect to have your dividends from AIICO to be reinvested under a DRIP. Six months after, AIICO declares a 3k dividend per share.

On dividend payment date, the price of AIICO shares had fallen to N0.85 per share and with 10,000 shares your broker realizes N300 for you and uses that money to buy additional 352.9 shares of AIICO for you.

By so doing, your share holdings of AIICO increased to 10,352.9 and your dividend falls out of the unclaimed dividend pool.

Advantages of DRIP

Not only will Dividend Reinvestment Plan help in solving the problem of unclaimed dividends, it helps reduce investment cost in that the additional shares are usually bought free of commission.

For example, if the investor that realized N300 from AIICO dividend takes that dividend into his or her brokerage account and then later decides to buy additional shares with it through a broker that charges a commission of N30 per trade, such an investor would be left with N270 to invest rather than the N300 that could have been invested via a DRIP, commission free. N30 may not sound like a big amount of money, but for a stock that pays dividend semiannually, this will amount to about N600 over a 10-year period.

Another advantage of DRIP is that it automatically sets in motion the compounding process of wealth accumulation. By reinvesting your dividend, over time you end up being a big investor in any particular stock that you hold. And as your investment increases through DRIP, so does your dividend and as your dividend increases through DRI so does your investment and the multiplier concept continue ad infinitum, as long as you continue to hold the stock and carry on with the DRIP.

Implementation of the Dividend Reinvestment Plan in Nigeria will add vibrancy to the stock market. Think of what will happen if the outstanding N129 billion sitting in unclaimed dividend account is pumped into the stock market through the DRIP. That will increase market capitalization and activity.

The only disadvantage of DRIP is that the investor does not have the choice to decide on investing in another stock different from the one that generated the dividend. Unlike when an investor realizes the dividend in cash into his/her brokerage account and decides which stock to buy with the resulting cash, DRIP forces investors to buy additional shares of the stock that paid the dividend.

DRIP and Company Law in Nigeria

It does not seem that Dividend Reinvestment Plan exists in Nigeria as a matter of law but given the ability of DRIP to curb the menace of unclaimed dividends and other advantages of the plan, it behooves the Security and Exchange Commission in collaboration with the Nigerian Stock Exchange to look into the DRIP program with a view to issuing relevant regulations that would enable both investors, brokerage houses as well as companies listed on the floors of the exchange to implement such a program.

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Understandably, this may not be that easy to implement but with the co operative actions from the companies, the regulators and brokerage firms, Nigerian investors and the Nigerian stock market stand to gain if DRIP can be part of Nigeria’s corporate action activities.

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Uchenna Ndimele is the President of Quantitative Financial Analytics Ltd. MutualfundsAfrica.com and mutualfundsnigeria.com (both Quantitative Financial Analytics company website) is a leader in supplying mutual fund information, analysis, and commentary on African mutual funds. We provide reliable fund data; and ratings information that will add value to fund managers, the media, individual investors and investment clubs.

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    Dividends

    SEC accuse CMOs of frustrating e-dividend mandate process

    The DG of SEC revealed that 4.01 million accounts still have incomplete KYC information as of April 8 despite the government’s efforts.

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    Unclaimed dividends: SEC wades in, reduces processing time to 1 week for beneficiaries

    The Securities and Exchange Commission (SEC) has faulted the activities of some Capital Market Operators (CMOs) which frustrates the e-dividend mandate process, leading to a rise in unclaimed dividends in the capital market.

    This is as the unclaimed dividends in the capital market were estimated to have risen to over N200 billion.

    According to a report from the News Agency of Nigeria (NAN), this disclosure was made by the Director-General of SEC, Lamido Yuguda, while speaking at the 2021 first post-Capital Market Committee (CMC) virtual news conference.

    READ: Why SEC should support democratization of sale of foreign securities

    What the Director-General of SEC is saying

    Yuguda, in his statement, said that the commission was aware that some CMOs were frustrating the e-dividend mandate process.

    He said, “We implore all stakeholders to comply with all directives of the Commission in this regard, as defaulters would be sanctioned appropriately. We have observed that the growth in the number of mandated accounts has been on the decline for some time.

    The capital market community has directed its e-Dividend Committee to engage with the Committee of Heads of Banking Operations to encourage better cooperation from banks as we tackle the challenges of unclaimed dividends.’’

    READ: Shareholders move against FG’s establishment of unclaimed dividend trust fund

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    The SEC boss reminded all CMOs that the commission’s directive on the update of investors’ Know Your Customer information was still in effect noting that the level of compliance had been low in spite of several engagements by the commission.

    Yuguda revealed that 4.01 million accounts still have incomplete KYC information as of April 8 despite the government’s efforts.

    He said, “Despite several engagements, we realised that as of April 8, there were still 4,012,311 accounts with incomplete KYC information. This exercise is critical to deepening the participation of retail investors and we direct all CMOs to accord it the highest level of priority.’’

    READ: SEC adjusts operations, introduces e-filing, other measures

    In case you missed it

    • SEC had earlier urged all Capital Market Operators (CMOs) to update their investors’ Know Your Customer information due to the low level of compliance.
    • The CMOs were also warned by SEC to stop providing any form of support to unregistered entities operating unlawfully in the country within the capital market as that would not be condoned.

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    Dividends

    BUA Cement pays N129 billion in dividend in 2 years

    BUA Cement has paid shareholders a dividend of N129 billion in 2 years.

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    BUA Cement pays N129 billion in 3 years

    BUA Cement Plc, one of Nigeria’s leading cement producers has recommended a total dividend payout of about N70 billion from the profits made in 2020.

    The company will be paying shareholders a dividend of N2.067 per share for all the outstanding 33,864,354,060 ordinary shares of the company.

    According to the figures contained in the company’s audited financial statement for the period ended December 31st 2020, the cement giant has now paid about a total of N129.26 billion to shareholders since 2019.

    Africa’s 6th richest billionaire, Abdulsamad Rabiu is the majority shareholder of the company, with an ownership stake running in excess of 90% of the outstanding shares of the cement company.

    The billionaire owns this stake directly, and indirectly through Damnaz Cement Company Limited, BUA International Limited and BUA Cement Company Limited.

    In line with this, we estimate that over 90% of the dividends paid out over the last 2 years were paid to the billionaire industrialist.

    The company’s dividend policy

    BUA Cement Plc has maintained a dividend payout of more than N1.75 per share in the last two years, and a dividend payout ratio that averages 97.3% over the last two years, with 2019 being the highest with about 98% in the dividend paid out of profits.

    • However, the defunct Cement Company of Nigeria (CCNN) that was acquired by BUA Cement, paid shareholders a dividend of N5.3 billion in 2019, which translates to a dividend of 40 kobo per share.
    • The dividend payout ratio for 2020 was 96.76%, meaning it retained a meagre 3.24% from the profits it earned during the year.
    • Total profits earned since 2019 is about N132.96 billion. Thus, over the last 2 years, it has paid out 97.2% of all its profits as dividends.
    • BUA Cement Plc is currently valued at about N2.46 trillion, this valuation is 34x (thirty-four times) the company’s earnings of N72.344 billion in 2020.
    • Despite paying out almost all its profits in the last 2 years, the cement manufacturer boasts strong retained earnings of N159.92 billion.

    What you should know

    • Focusing on price appreciation, the shares of BUA Cement from the price of N35.30 per share on April 1st 2020, are worth about 106% more in recent times, as the market value of the shares of the leading cement maker is currently put at N72.70 per share.
    • BUA Cement’s topline revenue rose from N175.52 billion in 2019 to N209.44 billion in 2020, the company’s profits also increased from N60.61 billion to N72.34 billion between 2019 and 2020.
    • BUA Cement’s total installed production infrastructure of 8 million MTPA, in line with the cement maker’s strategic midterm expansion program is expected to expand to 20 million MTPA by the end of 2022.

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