Dividends Excite the market

I have been following the current Bull Run on the ZSE with a lot of interest and a few personal smal ‘positions’ too. I own a bit of Old Mutual, Falgold, Pelhams – (Pelhams more for sentimental reasons than anything else. I bought my first TV stand from them and liked their merchandise. Their business model makes sense and i believe that in the long term they will make money). I also have Econet, Meikles, Afre and CBZ in my my buy and hold portfolio. I have been waiting patiently for a re-rating of this Banking Group.

Now that disclosures are out of the way, I can now delve into what I think of the stock market so far in Q1. To be honest few saw this Bull Run coming, let alone running this long, especially with people expecting elections in 2013. The key beneficiaries of this long run of the market are eternal optimists like me. So It is true, the market rewards those who wait. Those who have waited and watched Econet over the last 3 years know what i am talking about. With reporting season now starting, there are few points worth noting. Nothing stays down forever, if the fundamentals are right. This is what we are seeing on the ZSE, with counters like Econet, Delta, Innscor, TSL, to name a few. Which brings us to CBZ.

CBZ was among the first few companies to put its head on the block in 2013 reporting season which is about to take the market to even dizzier heights, if the results coming through are anything to go by. From 10 cents at the beginning of the year to just under 13.50 cents post the results, CBZ still has some way to go. Analysts have put out an intrinsic value of between 25-32 cents per share. Whether or not it will get there is another story. But for now those who bought at 10 cents or even at 6cents are in the money. I am not talking up CBZ! i am simply pointing out that if you believe that a counter has value buy it, and sit tight. One day you will be rewarded.

Econet,is one such example where the saying "never say never" applies. It has certainly been a marvel to watch. The counter which has been highlighted by analysts consistently as disappointing due to the fact that it has been trading at ridiculous P/Es of 4.5x compared to over 15x for many of its peers in the region has steadily climbed from $4.80 in December last year to $7.10, when it split its share 10:1. Post split the counter is trading at 76.1 cents. Many analysts have for years put the fair value of Econet at between 7.50 and 9 dollars. Like I said the market rewards those who wait. I take my hat off to the guys at Econet for unleashing a chain of events that have unlocked so much shareholder value. Whether these events were planned or not they have turned Econet into a valuable company that many of us have always seen it to be.

Many followers of this blog will recall my comments on blue chip counters post the dollarization of the Zimbabwean economy. I pointed out that many of these blue chips would carry the day owing to their robust and responsive business models. Prior to dollarization many of these businesses were cash cows, they remain so even as I write this article.

BAT gave out a hefty dividend of 42 cents in their latest results. When this news came through the dividend yield was 9% on the share. The counter is trading on a P/E of 7x. Old Mutual also posted some good results and declared a dividend which translates to 8 cents at the current USD/Rand exchange rate. The share price broke $2. This is an all time high for the shares listed on the Zimbabwe Register.

So it looks like this Bull Run is really well supported by the numbers streaming out of the corporate world.

The Sad Reality

The sad reality on the Zimbabwe Stock market today is that more than 80% of listed counters are undervalued and yet investors continue to sell out of positions they have long held. For some, these positions have been held from as far back as 1997 when the currency began to weaken and for many during the heydays of hyperinflation in 2007/8, when it was fashionable to be holding real assets. I looked at the Price/earnings ratios of all listed companies today and found many to be trading below the market average of 12x. Some solid counters are trading below 5x most around 7x. A number, such as Old Mutual are trading on a dividend yield of almost 2% and BAT has a dividend yield of 7%.

Our Stock market is being held hostage by a number of things we never imagined could stall progress since dollarization. I met with some guys who were promoting their company the other day and the minute a colleague of mine said, “Until the referendum and elections are out of the way there will be very little investment or activity in .....” My colleague was cut off mid-sentence. “The problem is that we keep saying this and use it as an excuse not to make business decisions and its getting us nowhere as businesses” the business promoter cut in abruptly.

He went on to explain that this is why the economy is not growing and why deals are not happening that can create jobs and grow the country’s GDP. I found this quite amusing not because it wasn’t true, but because here is someone who wanted investors to come into his project, with no money of his own, asking someone else to put our money in his! We are all in the same boat and want desperately to see the situation changing for the better.

Whats more the results that are being released covering the first six months of the year are coming in mixed. Companies involved in the real sector of our economy are now posting lower earnings and are failing to increase their sales.

How many people have money and are taking their chances or making a call to invest in Zimbabwe today? Very few, most of us are in the situation that most businesses are in. There is no cash to spare and we are knee deep in debt! The figures that have been pushed around on FDI are improving on year on year basis but nowhere near what they were when the country was at its peak.

The environment is very much better than the 80s or 90s when inflation was rising and businesses were trading in a weakening currency. You can barely say the same of liquidity conditions today. “ A US dollar is a US dollar”! But the dollars are becoming scarce. This is a mere reflection of how difficult things for most people. If things were easy, no-one would really worry about someone from Japan, India or Europe coming in to setup a business that they own 100%. This doesn’t make it right for us to stop investors from coming into our economy and setting up by setting onerous legislation. It doesn’t solve the problem that the country is facing. We need money to flow in, we need jobs, we need to export, we need technology transfer, we need new markets. The list goes on and on.

Every now and then when I get a chance I watch Bloomberg and CNBC and a story or two catch my attention. A story about the tax regime in the States caught my attention this week. A US company executive was speaking on why American companies that are creating jobs outside America should be punished by higher corporate taxes than local American companies. It is like saying run your business in the US when your biggest market is Africa. The guy did well as he mentioned that for his business markets where outside America and that is why it made sense for his company to setup a business in that market. What he did mention was that it was also cheaper to produce there etc. Should companies be penalised for doing what makes perfect economic sense?

It just got me thinking about our own situation as a country where we are not seeing any response from Tax authorities that encourages companies to invest locally even under the stricter company ownership laws. Imagine if there was a law that incentivised 51% locally owned companies to be formed via a lower tax rates or other fiscal benefits. We should be putting in place laws that encourage our businesses local or foreign to employ more, invest more etc. I rest my case.