If you are an investor looking at Cadbury as a great dividend bargain, sorry the shipped has sailed. You should have bought this stock a month ago when it sold for N4.95, its lowest price in at least a decade. A closer look at its numbers will provide an insight.
Cadbury Nigeria Plc has had a storied history in the annals of the Nigerian Stock Exchange. The scandals of the Bunmi Oni years are nearly forgotten and perhaps forgiven. Over the last 5 years, the company has embarked on a turnaround mission, trying to reclaim grounds it lost to the likes of Nestle, the consumer goods giant.
This year, it declared dividend per share of 49 kobo, almost double the 25 kobo it paid last year. This is also the first time the company is paying back to back dividends after a 3-year hiatus. Despite this significant achievement, the dividend recommended is somewhat underwhelming. You also need to look at its performance in 2019 to understand why. The company reported a profit after tax of N1 billion, the highest since 2015 when it reported profits of N1.15 billion. Revenue has also grown steadily throughout the years, going from N27.8 billion in 2015 to N39.3 billion in 2019. Unfortunately, it appears that for every year its revenues grow, its costs rise in tandem.
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For example, revenue has risen 9% on an annualized basis since 2015. The cost of sale and operating expenses has also risen by 9% over the same period. In fact, the cost of sale makes up a huge chunk of the total expenses. For every 100 in sales, it spends about N80 producing a significant rise from N67.6 for a N100 sale in 2015. To put this into perspective, Nestle, spent N55 for every N100 of goods sold. By not keeping a significant portion of its revenues as profits, the company stands no chance of paying significant dividends.
The impending recession is also not helping matters. It is obvious that between 2015 and 2019 the company had been clawing out of a crushing recession where a price increase is tough to implement under intense competition and the rising cost of operations. The recent COVID-19 pandemic and the blow of falling oil prices will perhaps slow down the recovery that the company is currently experiencing. It is worth stating that the company is debt-free but has this huge commitment in royalties that it has to pay its foreign owners. It paid N1.5 billion in 2019 in Royalties and Technical fees up from N662 million in 2018.
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So, should you decide to buy Cadbury today on the back of its dividend, you stand to get a return of 7% based on its current share price of N6.9 results. Surely, the are far better stocks than this out there. The dividend yield would probably be worse next year. You could look to the potential for capital appreciation as a motivation to buy. The stock has gained 41% since it hit its multi-year low of N4.95. At a price to earnings multiple of 12x, you could assume that it’s closer to being expensive than being cheap. Thus, you will have to be an overly optimistic guy to believe the stock will rise by another 41%, or perhaps you know something that others don’t.
Should you be looking for a dividend stock that can replace the yield you will get from investing in treasury bills or bonds, this is not that stock.