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Dividend yields fall to single digits on share price rally
Before the bull run of the last two years, dividend paying stocks were offering investors high yields that competed favourably with returns on government paper, including tax free infrastructure bonds.
Higher share prices at the Nairobi Securities Exchange (NSE) have cut the dividend yields for a majority of companies to single digits, forcing investors to consider alternative performance metrics such as profit ratios when making their stock picks in the market.
The bourse has seen its valuation go up by Sh1 trillion or 49.3 percent to Sh3.04 trillion over the last 12 months, mainly on double-digit percentage gains among large blue chip stocks that are also the more consistent dividend payers in the market.
Before the bull run of the last two years, dividend paying stocks were offering investors high yields that competed favourably with returns on government paper, including tax free infrastructure bonds.
The yields are calculated on the dividend per share as a percentage of share price, meaning they tend to fall when share prices rally, unless the companies raise their payout at a similar pace to their share prices.
Investors in the stock market earn a return on their capital when share prices go up, better known as capital gains, or through dividend payouts.
Dividend yields are, however, only one of the several metrics that an investor can use to identify investable stocks. For those chasing capital gains, a stock’s trading multiple is an indicator of whether it is cheap or expensive, which determines the potential to gain or lose value in future.
“Dividends had been a key driver of investor trading activity on the NSE especially in the 2018 - 2023 period given that it was on a long bear (downward trending) run,” said analysts at Sterling Capital in an equities note published on Wednesday.
“However, investors are increasingly gravitating towards valuing stocks through earnings multiples (price to earnings and price to book) as the NSE bull (upward trending) market has gained steam.”
Out of the 31 companies that paid a dividend for the 2024 financial year, only four have a trailing dividend yield of more than 10 percent –Standard Chartered Bank Kenya (14.7 percent), BAT Kenya (10.64 percent), Kapchorua Tea (10.59 percent) and Stanbic Holdings (10.48 percent).
One year ago, 11 companies were returning above 10 percent, led by cross-listed Ugandan power utility Umeme at 15.8 percent and KenGen at 15.2 percent. Yields for 11 companies have fallen below five percent, including large blue-chip firms Safaricom (4.1 percent), EABL (3.14 percent) and KCB Group (4.48 percent).
These large companies are the top dividend payers in the market, making them a favoured investment option for institutional and foreign investors who buy stocks with a longer term outlook, as opposed to speculators who take positions solely to benefit from short term share price increases.
A company’s ability to pay and increase dividends is also seen as a strong indicator of good financial health and stability, and when that is combined with a high yield as a result of low share price, it can point to an undervalued company.
Majority of companies are also offering investors an annual return that is well below what they would be getting from short term government securities over the same period.
The 91-day and 364-day Treasury bills are currently offering investors pre-tax interest returns of 7.7 percent and 9.2 percent respectively, having halved from highs of 16.9 percent in September 2024. Treasury bonds are meanwhile paying annual returns or coupons of between 12 and 14 percent.
