Capital Markets

Safaricom’s Sh27.5bn dividend payout plan sparks share price rally

A past Safaricom AGM at Kasarani stadium.
A past Safaricom AGM at Kasarani stadium. Safaricom’s decision to pay the extra dividend, which represents an interim payout for the current financial year, came after the firm paid all its debts in the wake of increased cash generation from its operations. PHOTO | FILE 

Telecoms operator Safaricom’s decision to pay a special dividend has sparked a rally in its share price, and raised its market value to a new record of Sh769.2 billion during yesterday’s trading at the Nairobi Securities Exchange (NSE).

The listed company yesterday announced plans to make a one-off dividend payment of Sh0.68 per share amounting to Sh27.5 billion on December 1 to shareholders on its register as of September 2, setting off an entry stampede that rallied the share price for the second day in a row.

Safaricom stock touched a record high of Sh19.2 during yesterday’s trading, giving it a market capitalisation of Sh769.2 billion or equivalent to that of all listed banks and East African Breweries Limited combined.

Investors rushed in to buy the telecoms operator’s stock in the quest to pocket the total dividend of Sh1.44 per share as the additional payout nearly doubled the yield from the previous four per cent to 7.5 per cent.

The latest dividend payment adds to the Sh0.76 per share, amounting to Sh30.4 billion, that Safaricom declared for the year ended March and will now share the same book closure and payout date with the extra dividend.

Safaricom’s decision to pay the extra dividend, which represents an interim payout for the current financial year, came after the firm paid all its debts in the wake of increased cash generation from its operations.

It signals that the company has more cash than it needs to fund its operations, including capital expenditure, which has topped the Sh30 billion mark in recent years.

The positive outlook has further fuelled the share price rally that had already seen Safaricom stand out as one of the few counters on the rise amidst the general bear run in the market that has seen other blue-chip stocks plummet by double digits.

Market data showed that investors yesterday placed orders to buy 33 million shares of Safaricom, dwarfing sale orders of 3.3 million and causing the stock to gain 4.1 per cent to close at an average of Sh18.85 compared to Sh18.1 on Monday.

The premium valuation signals increased investor confidence in the telecoms operator’s future prospects, with early shareholders reaping the most compared to those buying at the current price, which some analysts say is expensive.

Investors, who bought into the firm during its 2008 initial public offering (IPO) at Sh5 per share, for instance, have nearly quadrupled their investment and stand to book a dividend yield of 28.8 per cent in December alone.

Those buying now are betting on the continuation of the company’s stellar performance in the foreseeable future, defying advisories by several analysts that place the company’s fair value at less than Sh20 per share.

Asset manager Cytonn Investments, for instance, in May advised investors to reduce their holding of the telecoms operator’s stock which was at the time trading at Sh17.3.

“We recommend a lighten for the Safaricom stock with a target price of Sh16.6 representing an upside of 0.2 per cent, from the current price of Sh17.3 as at May 13, 2016, inclusive of a dividend yield of 4.2 per cent,” Cytonn said in the report.

Ahead of Safaricom’s results for the year ended March, Standard Investment Bank (SIB) assigned the company’s share price a fair value of Sh13.94 and advised clients not to take new positions in the stock.

The telecoms company announced a 19.6 per cent rise in net profit to Sh38.1 billion in the period, beating SIB’s estimates by 3.8 per cent.

With the company expected to maintain a dividend payout rate of 80 per cent of profits, continued increase in earnings should see the absolute dividends rise over the years.

Safaricom’s return on equity (ROE) currently stands at 32.6 per cent, one of the highest among the blue-chip stocks at the NSE.

The share price rally has, however, narrowed down the prospective returns, with the telecoms operator among the most expensive stocks at a price-to-earnings ratio of 20 times.

At Sh19.2, the company is valued at 6.5 times its net asset value of Sh2.9 per share or Sh116.7 billion in aggregate.

With a market capitalisation of Sh769.2 billion, Safaricom now accounts for 38 per cent of the entire stock market in what has raised concerns over its influence on the Nairobi bourse.

“Due to its sheer size, the listing of Safaricom shares portends a market risk accounting for a significant percentage of market capitalisation and trading volumes,” the CMA said in a report that reviewed the impact of the telecoms operator’s listing.

Trading in the company’s stock yesterday helped raise the market’s total value by Sh31 billion to Sh2 trillion compared to Sh1.99 trillion on Monday.

Safaricom’s IPO helped to double the number of investors at the NSE from 800,000 to a 1.6 million and the telecoms operator’s listing of 40 billion shares  has seen it account for about a quarter of total equities turnover.

The company’s premium valuation, which has seen it recover from lows of Sh2.7 per share in early 2009, comes as it captures and grows a large market share in voice, data and financial services.

Its proprietary M-Pesa platform, which started as a person-to-person cash transfer service, has been developed to offer a wide array of solutions, including payments and credit.