Faltering Guinness pays bumper dividends but Diageo rakes in billions in royalties

Shareholders of Guinness Nigeria Plc recently received positive news when the company reported a profit after tax of N5.4 billion for the financial year ended June 2019, down from N6.7 billion same period last year.  Despite the drop-in profits, they will be receiving N1.54 per share in dividends as against N0.64 the year before. The dividend payment is back in naira per share after two torrid years of being paid in kobos. If only they knew. 

Guinness surprised investors three years ago when it posted its first-ever full-year loss. The beer maker has been grappling with declining sales and shrinking margins as Nigerians shift taste to cheaper value alcoholic brands. Fierce competition in this space has also not helped matters at all forcing the company to relook its strategy.  

Behind the veil: Guinness Nigeria’s latest results show it still has many challenges to confront before it achieves its desired turnaround. 

• Revenues were N131 billion, 8% down from the N142.9 billion it posted a year earlier. It risks losing second place to International Breweries in terms of market share. 
• Gross Profit margin was also lower as it spent N70 for every N100 in sales on direct costs. This compares to N66 a year earlier. 
• Guinness spent about N10.1 billion on advertising and promo to generate sales of N131 billion (12.9x) compared to N12 billion last year to generate sales of N142.9 billion (11.9x).
• Nigeria Breweries spent N23.7 billion on advert and sales promo to generate N324.3 billion in sales (13.6x) a better return when compared to Guinness. International Breweries generated spent N7.8 billion on same to generate N120.6 billion in revenues (15.8x).
• Even though interest payment dropped by over 45% (thanks to its capital raise and subsequent debt repayment) it wasn’t enough to boost profitability 
• Declining sales and rising operating expenses meant Guinness performed poorly in terms of margins and efficiency. 
• Guinness return on equity, the most important ratio for shareholders, fell to 6.2% down from 10.3% last year.  
• Based on this, Shareholders are better off keeping their money in a fixed deposit than holding Guinness Stock. And by the way, its dividend yield is a mere 4.8%. 
• Its share price of N35 is 14x its earnings despite being 59% down from its N90 share price a year ago. It was N185 5 years ago. Expensive by market standards.

Who is winning? Whilst shareholders about 42% of them will have to make do with a only 4.8% dividend yield, the same cannot be said of Diageo, the parent company with 58% ownership of Guinness.  

• Two years ago, a capital raise of N40 billion was used to pay down its dollar-denominated debt to its parent company, Diageo. 
• This payment has helped unlocked a very important milestone payment to Diageo, Franchise fees and royalties. 
• This year alone Guinness paid Diageo N3.6 billion in Royalties and Technical services fees. This compares to just N503.8 million a year earlier and N1.37 billion in 2017. 
• In addition, they also get another N2.3 billion out of the N4 billion it declared as dividends. 

Corporate Governance: When a company has about 15 top-notch directors made on its board things can hardly go wrong. Guinness Nigeria Plc, Nigeria’s third-largest brewer by revenue boast of some of the most experienced board any quoted company in Nigeria can wish for.

6 out of its 15 directors are Independent Non-executive directors while 7 others are non-executive (including the Chairman and his Vice). The remaining 2 are executive and oversee the day to day operations at the company.

It’s CEO Magunda, a Ugandan was appointed June last year while Njoroge his deputy is Kenyan. Under Seni Adetu its last Nigerian CEO, Guinness recorded some of the worst results in its history. 

Surely, it has the right people and corporate governance to help turn things around. They will need to hasten up because a beer war is a zero-sum game. There can only be winners and losers.  

Update: Guinness Explained in its Investor Earnings Call transcript that the payment in Royalties and Technical Services Fee covered 2018 and 2019 results respectively.

So we had two years of [un-accrued] royalties and technical service fees which we hadn’t accrued for in their respective periods. We called this out in the previous financial statement as contingent liabilities. Now that the ruling has changed and the FRC has also revoked the notice we have taken that into account. So in this year’s financial there is about ₦3.1 billion which relates to expenses which would have otherwise have fallen in F17 and F18. I’ve