Last week we wrote how the total return of our Model Equity Portfolio was some 4.79 percentage points higher than its share price return. Which of the top-20 stocks in the NGX All-Share Index have provided the best total return, year-to-date? And do these data provide a good guide to investing? Total returns do not give the complete guide to investing in the equity market, but they certainly help
The Best Stocks for Total Returns
Last week we wrote how the total return of our Model Equity Portfolio was some 4.79 percentage points (479bps) higher than its share price return, which is broadly what we would expect from the NGX All-Share Index as a whole. The total return is given by receiving dividends from a stock and reinvesting them immediately. The next question is: “Which of the top-20 stocks in the NGX All-Share Index have provided the best total return, year-to-date?”
The answers are, in descending order for the top five returners: BUA Foods, whose total return year-to-date has been 69.4%; Seplat, with 67.2%; Airtel Africa with 54.1%; Okomu Oil with 30.5% and ETI with 29.4%. In most of these cases the underlying share price performance has been the main driver of the total return. Airtel Africa, for example, has delivered 51.8% in share price return, year-to-date, and 54.1% in total return. In other cases, the payment and reinvestment of dividends has made a material difference, as in the case of BUA Foods whose share price return, year-to-date, has been 58.5% but whose total return has been 69.4%.
In terms of total return, Okomu Oil is the outlier among the top five returners. Its share price return, year-to-date, has been 18.0% but its total return has been 30.6%, 12.6 percentage points higher. Okomu Oil has been generous this year (a peak year for palm oil prices), paying a dividend of N8.0/share in May, a further N7.0/share in August and N2.0/share more in November. It makes sense to separate out share price returns from total returns in order to identify generous dividend payers. In the next table we take the top-20 stocks in the NGX All-Share Index by index weight and arrange them by their excess total return over their share price return (totalreturn minus share price return).
When we commenced this part of the study, we thought the results would feature mainly bank stocks, as banks are typically generous dividend payers. In fact, there are as many non-banks as banks among the top scorers. Okomu Oil, BUA Foods, MTN Nigeria, Dangote Cement, Dangote Sugar and Seplat are the industrial stocks, among the top-20 index weights, whose total returns have exceeded their share price returns by five percentage points or more, so far this year
It would be tempting to build a portfolio around these stocks. After all, generous dividend payers are generally profitable companies. The problem one might encounter is liquidity. The top-five stocks which we measure by excess return over share price return (Okomu Oil, UBA, Zenith Bank, BUA Cement and GTCO) account for just 10.92% of the market by index weight. All the same, it is worth bearing this factor in mind when constructing a portfolio because it may make sense to construct overweight positions accordingly. Investors disproportionately trade stocks with high dividends; trading volumes of banks vastly exceed the volumes in any other sector, despite the six banks in our charts making up just 11.62% of the index. Bank stocks also tend to have high free floats, so there are plenty of available shares to trade.
What can we conclude from the above? Not all generous dividend payers are good performers in terms of stock prices (this is true of most of the banks, so far this year), but when the underlying fundamentals driving a stock are favourable, it makes sense to follow the generous dividend payers and to reinvest.
Last week, the exchange rate at the Investors and Exporters Window (I&E Window) lost 0.06% w/w to close at N445.75/US$1. Elsewhere, the foreign exchange (FX) reserves of the Central Bank of Nigeria (CBN) decreased by 0.38% to US$37.37bn, a 10-week low, as the CBN continues to intervene across the various FX windows. The FX reserve position remains close to its historic high, and we doubt that the CBN wishes to see the exchange rate slip. Therefore, we believe that the current I&E Window rate, or something very close to it, can be maintained for at least several months.
Bonds & T-bills
Last week, trading in the Federal Government of Nigeria (FGN) bond secondary market was mixed albeit with a bearish tilt as the average benchmark yield for bonds rose by 1bp to close at 14.38%. Across the curve, the yields on the 3-year (+10bps to 14.30%) bond expanded while the yield on the 7-year (-15bps to 14.45%) and 10-year (-1bp to 14.54%) bonds declined. Our view remains that the combination of thin system liquidity and elevated Federal Government domestic borrowing will continue to drive yields upwards overthe coming months.
Activity in the Treasury Bill (T-Bill) secondary market was bearish as the average yield for T-bills rose by 5bps to 10.68%. Conversely, the yield on the 335-day T-bill declined by 4bps to close at 15.41%. At the T-bill primary auction, the DMO allotted N213.43bn (US$478.18m) worth of bills. The auction recorded a total subscription of N360.25bn, implying a bid-to-cover ratio of 1.69x (vs 1.92x average of the past auctions in the year). Consequently, stop rates across the 91-day (6.50%) and 182-day (8.05%) bills remained unchanged from the last auction while the stop rate on the 364-day (+85ps to 14.84%, implying a 17.42% annual yield) bill rose. Elsewhere, the average yield for secondary market OMO bills fell by 2bps to 10.15%, while the yield on the 158-day OMO bill fell by 2bps to 10.92%.
Last week, the price of Brent posted its third consecutive weekly loss, down 4.55% to settle at US$83.63/bbl, the lowest since 27 September. Brent is now up 7.52% year-todate and has traded at an average of US$100.87/bbl, 42.29% higher than the average of US$70.89/bbl in 2021.
Oil prices hit a 10-month low following a breakout of industrial action in China over stringent COVID-19 curbs. In addition, uncertainty around the price cap on Russian oil by the G7 and a higher-than-expected build in US oil inventories contributed to out downward pressure on oil prices. Elsewhere, a meeting of the Organisation of the Petroleum Exporting Countries and allies (OPEC+) is due to be held on 4 December.
Our view is that COVID-19 challenges in China and the proposed price cap on Russian crude are likely to limit potential upside. Nonetheless, we maintain that prices are likely to remain well above the US$73.00/bbl set in Nigeria’s government budget.
Last week, the NGX All-Share Index extended gains for the second consecutive week, up 6.88%, the biggest weekly gain since 18 December 2020, to settle at 47,554.34 points, the highest point since 14 October. As a result, its year-to-date return rose to 11.33%. Nigerian Breweries (+18.67%), Airtel Africa (+14.17%) and BUA Foods (+11.23%) closed positive while Nestle Nigeria (-20.67%), Presco (-8.71%) and Seplat Energy (-3.57%) closed negative. Performances across the NGX sub-indices were broadly positive as the NGX Industrial Goods (+9.45%) led the gainers, followed by NGX-30 (+6.59%), NGX Insurance (+5.06%), NGX Banking (+3.06%), NGX Pension (+2.73%) and NGX Consumer Goods (+0.15%) sub-indices while NGX Oil and Gas sub-index (-1.29%) closed lower.
Model Equity Portfolio
Last week the Model Equity Portfolio rose by 6.74% compared with a rise in the NGX All-Share Index of 6.88%, underperforming it by 14bps. It has gained 16.58% year-to-date compared with a gain in the NGX-ASI of 11.33%, outperforming it by 525bps.
As we forewarned in this publication last week, we took our underweight positions in Airtel Africa and Dangote Cement back up to neutral weights and began to make an overall index-neutral position in the banks. These actions came just in time, saving us 107bps (i.e. we would have underperformed by 121bps had we done nothing) .
With the market up sharply last week, the index weights of 18 November have themselves shifted, and so we are aiming at a moving target. We will continue to make notional purchases to bring our Model Equity Portfolio broadly in line with neutral index weights, at least as far as the top-five stocks by index weight are concerned (which is to say: Airtel Africa; Dangote Cement; MTN Nigeria; BUA Cement and BUA Foods which together account for 75.55% of the NGX All-Share Index).
We remain content, for the time being, to have underweight notional positions in Nestle Nigeria and Seplat. We will adjust, upwards, our notional holdings in the banks (making notional purchases in the ones we already own) to raise our overall exposure to around 11.50%. As for the other mid-caps in the Model Equity Portfolio, we will increase our notional positions in Guinness Nigeria, Nigerian Breweries and Flour Mills of Nigeria to near to their index weights (none of these weights are very large) but remain underweight in Okomu Oil and Presco. We will press on with these changes this week and review them next week.