Naira depreciation threatens 2023 dividends for companies with foreign liabilities- Operators

Some capital market operators have cautioned that quoted companies burdened with foreign liabilities or heavily dependent on imported inputs could face a downturn in 2023 dividend payouts to their shareholders.

The operators interviewed by Nairametrics following the free fall of the naira arising from the harmonization of exchange rates attributed this potential decline to the mounting pressure on profit margins resulting from the current economic climate.

Conversely, they highlighted those enterprises boasting substantial net foreign assets or those primarily reliant on local sourcing of inputs, along with products exhibiting elastic demand, may be better equipped to withstand the challenges posed by the depreciation of the Naira.

They noted that such companies could potentially maintain or even exceed previous dividend payouts, despite the prevailing economic headwinds.

Recent Performance of Naira

Naira on Monday fell to a record low of N1,348.63 per dollar following strong demand on the official market, also known as the NAFEM market.

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This is despite the news of the additional release of 500 million dollars to various sectors in its determination to address the backlog of verified foreign exchange transactions by the Central Bank of Nigeria (CBN).

This represents 33.87% or N456.73 weaker than N891.90 recorded at the close of trading on Friday.

The observed depreciation is unparalleled and stands as the lowest point in the historical performance of the Naira, reflecting the severity of the current economic challenges.

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The intraday high recorded was N1414.94/$1, while the intraday low was N701/$1, representing a wide spread of N713.94/$1.

On the black market, the exchange rate remained weak, with quotes as low as N1,450/$1 from unofficial dealers and N1,466.20/$1 from peer-to-peer traders. This is making it more expensive for Nigerian companies to repay their foreign loans.

The recent depreciation of the naira is a result of several factors, including the rising demand for dollars from importers and the ongoing decline in Nigeria’s foreign exchange reserves.

The Central Bank of Nigeria has intervened in the foreign exchange market in an attempt to stabilize the naira, but these interventions have had limited or no success.

The depreciation of the naira is hurting Nigerian businesses and consumers. Businesses face higher costs for importing raw materials and equipment, while consumers pay more for imported goods and services.

What market experts are saying:

The Chief Executive Officer of Wyoming Capital and Partners Mr. Tajudeen Olayinka, speaking to Nairametrics exclusively forecasted a tale of contrasting outcomes for quoted companies based on their net foreign assets.

According to Olayinka, companies with net foreign assets in dollars are poised to reap abundant profits, while those with liabilities in foreign currency may face significant devaluation or substantial losses.

The implications of this analysis are profound, particularly for shareholders of publicly traded companies.

Olayinka predicts that companies with substantial net foreign assets will likely see a robust increase in dividends from their 2023 accounts, fueled by significant profits or what he refers to as “bountiful harvests.

Conversely, he said that companies burdened with foreign liabilities might struggle to maintain their shareholder dividends, potentially dipping into revenue reserves or, in some cases, foregoing dividends altogether.

• “Quoted companies with net foreign (dollar) assets will experience bountiful harvests, while companies with net foreign (dollar) liabilities will experience diminished values or huge losses. 
• What this translates to is that some public companies will pay higher dividends from their 2023 accounts because of huge profits or bountiful harvests, while those that recorded losses will either be compelled to pay dividends from revenue reserves or pay no dividend to shareholders,” he said. 

Olayinka noted that some companies adversely affected by foreign exchange losses might have taken proactive measures throughout the year to mitigate these challenges.

• “The truth is that some of those companies badly affected by foreign exchange losses would have repriced their earning assets in the year, in a manner that ensured absolute reduction in year-end losses or return their respective companies to profitability,” he said.

Also, in an interview with Nairametrics, Executive Vice Chairman of Hicap Securities Limited, Mr David Adonri, underscored the ripple effects of the Nigerian Naira’s recent floatation, highlighting significant challenges for import-dependent companies amidst escalating foreign exchange rates.

Adonri emphasized that the surge in the foreign exchange rate has triggered a notable uptick in the cost of production inputs, subsequently driving up the prices of finished goods.

According to him, this surge, in turn, has become a catalyst for inflation across the broader economy. Import-reliant companies, grappling with heightened input costs, may encounter substantial hurdles in passing on these additional expenses to consumers, thereby facing potential profit squeezes.

• “With the high foreign exchange rate precipitated by the recent floating of the Naira, the cost of inputs for production has escalated. 
• This has also led to an increase in prices of finished goods, thereby fueling inflation in the general economy. Most companies that are import dependent for most of their inputs may find it difficult to pass their extra cost to consumers and hence suffer depression in profit,” he said.

The implications extend to dividend yields, with Adonri cautioning that companies heavily reliant on imported inputs may witness a decline in dividend payouts as profit margins come under pressure.

Conversely, he noted that enterprises that predominantly source inputs locally or possess products with elastic demand may weather the storm more effectively, potentially maintaining or even surpassing previous dividend payouts despite the depreciation of the Naira.

Managing Director of Arthur Steven Asset Management Limited and former President of the Chartered Institute of Stockbrokers (CIS), Mr. Olatunde Amolegbe said that with the prevailing foreign exchange (FX) instability, sectoral vulnerabilities are becoming increasingly apparent, with Consumer Goods and Industrial Sector companies poised to bear the brunt of the turmoil.

Amolegbe outlined two primary reasons for amplifying the impact on these sectors.

• Firstly, he noted that the erosion of disposable income among consumers could trigger a shift towards product substitution as individuals tighten their belts in response to economic pressures.
• Secondly, companies within these sectors may struggle to pass on the full FX-related costs of their products and services to consumers, fearing a decline in sales volumes due to consumer resistance.

Furthermore, Amolegbe highlighted the formidable challenge of determining product pricing amidst the backdrop of fluctuating FX rates, exacerbating the strain on these sectors. Particularly concerning are companies within these sectors burdened with foreign loans, as they face the additional risk of escalated repayment costs unless the loans are denominated internally.

The prognosis for these sectors necessitates significant adjustments to navigate the turbulent FX landscape effectively. Amolegbe pointed to recent corporate results, such as those from Guinness Nigeria, as evidence of the sector’s struggle in grappling with these challenges.

What you should know: 

This analysis underscores the intricate interplay between foreign exchange dynamics and corporate performance and the contrasting fortunes awaiting companies based on their exposure to foreign liabilities and import dependency, highlighting the importance of proactive management strategies in navigating such volatile environments.

With the specter of inflation looming large and import-dependent companies facing profit headwinds, proactive strategies to mitigate cost pressures and adapt to shifting market dynamics become paramount.

As companies begin to unveil their 2023 financial results, shareholders are advised to pay close attention to the impact of foreign exchange fluctuations on dividend payouts and overall corporate health

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