CCSfs Dividend Research - Perking Up Your Dividend Returns1

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CONTACTS Investment Advisory Waceke Nduati – Omanga [email protected] Portfolio Management Regina Gachengo [email protected] Salim Mzee [email protected] Research and Analysis Alexander Muiruri [email protected]

Table of contents

Introduction to Dividend Research…………………………………….…….1

Introduction to the NSE……………………………………………………….3

Introduction to Dividends…………………………………………………….4

THEME I: MAXIMIZING RETURNS

Graphical Representation…………………………………………………5

High Dividend Yield, High Returns……………………………………..6

THEME II: REINVESTMENT OF DIVIDENDS

Long Term Returns and Inflation………………………………………...7

Simple Reinvestment Strategies…………………………………………10

THEME II: EQUITY INCOME FUNDS

Modeling a Portfolio ……………………………………………………..13

Conclusions………………………………………………………………..16

APPENDIX

NSE 20 Index, Tier Composition & Corporate Actions………………..17

NSE 20 and AIG 27 Index Composition………………………………...18

Paycheck Stock Profile – East African Breweries………………………19

Paycheck Stock Profile – Bamburi Cement……………………………..20

Paycheck Stock Profile – Standard Chartered Bank ..…………………21

Paycheck Stock Profile – British American Tobacco…………………...22

Paycheck Stock Profile – Nation Media Group...………………………23

Paycheck Stock Profile – Total Kenya…………...………………………24

References.…………………………………………...…………………….25

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Perking Up Your Dividend Returns 19th January 2009

- 1 – C C S F S R E S E A R C H • R E S E A R C H A N A L Y S T : A L E X A N D E R M U I R U R I

E - M A I L : R E S E A R C H @ C R E A T I V E C A P I T A L . C O . K E • W E B S I T E : W W W . C C S F I N A N C I A L S O L U T I O N S . C O M

Introduction to CCSfs Dividend Research CCSfs introduced you to its dividend theme in early August 2008 at a time when the market had corrected itself and signs of an impending negative (bearish) sentiment had begun to emerge. The idea was to design an experiment that would investigate whether a portfolio that targeted income oriented dividends could survive the high volatility and provide an adequate return given the inflation data available at the time. The experiment was conducted due to the fact that not many studies were available concerning a slump in the Kenyan stock market in reference to strategies that could be adopted (and if they did exist they weren’t widely available to the public1). Although to a large extent this study was influenced by a previous research paper published by Tweedy, Browne Fund Inc, titled “The High Dividend Yield Return Advantage” who theorized that the reinvestment of dividends could be termed as a “bear market protector” and a “return accelerator” (Tweedy, Pg10). However, I restricted the investigation into looking at the results of implementing a dividend oriented strategy versus a growth oriented strategy (although not much is mentioned about growth in this document), which was a decision many Kenyans would have had, to have made, given the background of the post poll violence. Consequently the data sets collected begin on the first week of 2008 and 2nd January, 2008 was used as the starting point for the brief study. Besides the two model portfolios (dividend & growth) other portfolios were constructed based on some sectors such as diversified media shares or banking shares; however, they were largely used for purposes of comparison. The two main portfolios examined were the ‘high earnings growth’ portfolio and the ‘dividend’ dubbed the ‘paycheck’ portfolio. A comparison between the total returns on both the portfolios was taken to ascertain which portfolio would outperform the other given the challenges of the concluded elections and the global trends at the time. The graph below illustrates the movements of the two portfolios during 2008 and shows the margin by which each portfolio had outpaced the other in terms of total returns.

*The 2nd of January, 2008 is the base date, Source: NSE pricelists 1 Generally getting information on the Kenyan capital markets prior to 1998 is extremely difficult. However, comprehensive discussion papers have been written by the Kenya Institute for Public Policy Research and Analysis (www.kippra.org) since 2003



The paycheck portfolio closed the year 1.5% down while the growth portfolio closed the year 10.3% in negative territory. Despite the growth outperforming the paycheck for 106 consecutive days between April 2008 and September 2008, the paycheck outperformed the growth by 16 overall days by the years’ end. During the five years prior to this the growth portfolio had outperformed the paycheck portfolio by over 4.2 times on the basis of five year returns; but as the market dipped during at the beginning and toward the end of the year the dividend-paying counters stood out. A key difference could be seen in the level of stability in pricing as the paycheck portfolio that hosted a number of counters offering better income streams received higher confidence from local investors. A quick look at the standard deviation between the total returns on both portfolios would reveal that the paycheck portfolio exhibited less than 55% volatility attained by the growth and less than 35% of the volatility attained by a portfolio modeled on the NSE 20 Share Index. An important observation made was that the growth portfolio responded faster to market rebounds but lacked the necessary support during the periodic slumps. The graph below charts the two portfolios in 2008 by the changes in their total returns to the stockholder.

*The 2nd of January, 2008 is the base date, Source: NSE pricelists The remainder of this paper examines dividend investing by means of three themes namely: maximizing returns, reinvestment of dividends and modeling an equity income portfolio. The main highlights of the paper are:

• Dividends are the trustworthy pacemakers that keep the heartbeat of your portfolio steady and maximize

its full potential;

• Dividends fit you with new legs to help you outrun inflation that is notorious in African markets;

• Dividends reinvestment is key to earning compounded returns, spreading risks on your portfolio and providing spare change to take advantage of new opportunities; and

• Equity income funds may just inject the right mix of income and capital growth to keep you ahead of the market and help you take control of your own returns during a year expected to be turbulent.



Introduction to the Nairobi Stock Exchange (NSE) The Nairobi Stock Exchange is Kenya’s only stock exchange and has about 55 listed companies. The exchange was constituted as a voluntary association of stockbrokers registered under the Societies Act (Source: NSE Handbook 2006). The stock exchange currently runs on an electronic trading platform known as the automated trading system and is open daily for a six hour trading period. The stock exchange’s main market index is the NSE 20 Share Index and also has an aggregate index known as the NASI All Share Index. The exchange trades in ordinary equity, preference shares and treasury bonds and has four companies cross-listed on regional stock markets. Within the last few years the Nairobi bourse has grown from a market capitalization of Ksh112.59 b ($1.42 b) in 2002 to Ksh853.88 b ($12.38 b) in 2008 (it hit a peak of Ksh1.28 tn ($18.53 b) in June 2008). The graph below summarizes the changes in market value between 1990 and 2008.

*Figures relate to end year values, Source: Nairobi Stock Exchange (NSE) Timeline of key policy changes affecting dividends or returns at the NSE

During 1964-1970…dividend income was double taxed and because dividends were not deductible expenses, corporate earnings distributed as dividends had a high effective tax rate. This made it more expensive for corporations to provide adequate after-tax-return on equity and therefore the preference for debt financing…(Rose Ngugi & Roline Njiru, 2005)

In June 1975, a capital gain tax was introduced and set at 36%; it was progressively reduced by 50% in 1981 and consequently by 25% in 1982.

In the 1974/75 fiscal year the rate of tax on dividends paid to non-residents was raised from 12.5% to 15% and 20%. The rate of withholding taxes on resident dividends also went up to 15%.

The 1981/82 adjustments made on the capital gain tax saw only 50% of the net gains subjected to corporation tax, such that with a corporation tax of 45% company paid only 22.5% of net gains as tax. For individuals, tax on gain was progressive for 10% up to 35%. In addition, withholding tax on investment shares was reduced from 35% to 15% aiming to boost the stock exchange. The capital gain tax was aimed at generating additional revenue and curb excessive speculation.

In the 1990/91 fiscal year withholding tax rate of 15% on dividend income paid to residents was made final tax in order to reduce incidence of double taxation on corporate dividends and incomes to individuals arising from investment in securities.

Further all dividend and interest income to unit trusts were made subject to withholding taxes of 15% and 10%, respectively, such that this was a final tax not subject to further corporate or personal tax.



In 1992/93 the withholding tax on dividend income was reduced to 10% and rationalized with the rate applicable to interest income.

In the 1996/97 fiscal year, withholding tax on dividend income was lowered from 10% to 5% for local investors, while it went down to 7.5% for non-residents

Within the 1997/98 period to encourage equity in medium-sized companies with growth prospects, venture capital funds were allowed to enjoy a 10-year tax holiday on their dividend incomes

In 1997/98 AIG Investments Kenya launched the AIG (East Africa) 27 Index, a new market capitalization weighted index designed to track the total returns (capital gains plus dividends) of 27 companies listed on the NSE. The index was started at a base of 100 points and is computed through an arithmetic mean

Current legislation and recent budget proposals

1. Resident banks are prohibited from paying a dividend if there are accumulated losses from prior years (Central Bank of Kenya Prudential Guidelines for Institutions Licensed Under the Banking Act)

2. Currently any dividend received by a resident company, other than a dividend received by a company which controls directly or indirectly less than 12.5% of voting power of the company paying the dividend, shall be deemed not to be income chargeable to tax (Income Tax Act, 2007)

3. Dividends that remain unclaimed for more than seven years be paid to the Capital Markets Compensation Fund (Budget Speech, Fiscal Year 2006/7)

4. All citizens of the East African Community Partner States (comprising Kenya, Tanzania, Uganda, Rwanda and Burundi) who invest in the Nairobi Stock Exchange are treated as local investors where they earn dividend income as residents and pay the withholding tax at the rate of 5% just like Kenyans (Budget Speech, Fiscal Year 2007/8)

Introduction to dividends

Not many people know and even care about dividends due to the fact that investor education has not been a priority in the Kenyan market. Dave Van Knapp (an author of books on stock investing) made some interesting comments on perceptions of dividends stating that people largely find them uninspiring, a lack of creative thinking on the part of the payer and reserved for a more mature investor. It is understandable that people would feel this way given the Bull Run experienced in Kenya from 2003 to 2007; but, it was the get-rich-quick culture that really cemented investing as a speculative activity. Sharp lessons over the past year have made people turn away from the gambling game and place bets on dividends, holding a new deck of cards belonging to income seekers. To learn how to invest in dividends we must first know what they are & what they should mean to you Dividends are payments made by a company to its shareholders in reward for contributing capital. So the dividend per share would be the amount of interest each share has earned (i.e., interest earned by an investor in reward for buying a company’s shares) and is a percentage of the company’s earnings. Investors can multiply the number of shares they own by the dividend per share in order to calculate the total receivable amount. According to the Wikipedia website “when a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be paid to the shareholders as a dividend. Many corporations retain a portion of their earnings and pay the remainder as a dividend”. Some terms used numerously in this paper include the dividend yield, which is simply the dividend per share divided by the price of the stock and the dividend payout (or payout ratio), which is the percentage of earnings disbursed as dividends. Dividends mean a lot of things to a lot of people; e.g., they may appear to be valuable only to retirees (as they are income seekers); but, you’d find that the long term benefits accrue more to younger investors. While dividends may be boring and uninspiring they can serve as a defensive against messy markets and accelerate long term returns. While a firm who pays high dividends may be accused of having no long term prospects, these payments serve as evidence that earnings exist in a real form and investors can be rewarded without ceding voting rights. Multinationals repatriate profits through dividends and often use them as a source of funding for projects. Finally dividends are important to investors who need income regularly to support themselves and others. The important factor that sets dividends stocks apart is that they can offer income and above average capital growth.



THEME I: MAXIMIZING RETURNS

The graph below illustrates the impact dividends had on the two portfolios in 2008 and it is worthwhile noting the wider margins on the paycheck portfolio whose returns proved to be superior during the bearish period.

*Base date for the graph was 2nd January, 2008 with an assumed initial capital outlay of Kshs. 1,000, Source: CCSfs estimates

The paycheck portfolio was victorious but still ended 2008 a loser; but, running a simple dividend reinvestment strategy generated a more favorable outcome. The graph below tracks a scenario where dividends disbursed were reinvested two weeks after cheques were in the mail. The product is an example of how returns are maximized!

*Base date was 2nd January, 2008 with an assumed initial capital outlay of Kshs. 1,000, Source: CCSfs estimates



Can High Dividend Yields Maximize Returns?

The research report by the Tweedy, Browne Fund Inc, (page 5) investigates the returns and market risk on a number of portfolios ranked by their dividend yields. We have done the same below taking a sample of 35 companies and ranking them according to their respective average five year (2003 to 2007) dividend yields (unfortunately we only covered a very short period). The counters excluded from the exercise included those who had not paid dividends between 2003 and 2007, those in the Alternative Investment Market (AIMS) as well as those who could not provide a five year return history (meaning all IPO counters listed since 2006). The exercise was supposed to examine the returns on each portfolio, the aggressiveness of the dividend policy as well as the risk return tradeoff based on the average five year dividend payout. The portfolios were sorted into seven tiers with five stocks in each tier and the purpose of the exercise was to see which tier would score the lowest score. According to Tweedy research paper it was not the high yields that gave the best compound returns but a high yield coupled with a slightly lower payout ratio. Despite the interesting findings below there was little (but negative) correlation between total returns and payout ratios (-0.35) and even less with dividend yields (-0.16).

*Composition of the 7 Tiers can be found in the Appendix on page 17, Source: CCSfs estimates

The findings indicate the tier with the highest dividend yield scored best in terms of the risk return tradeoff, where it had the lowest risk as measured by the coefficient of variation (CVAR). According to the Investopedia website “the coefficient of variation represents the ratio of the standard deviation (risk) to the mean (average dividend payout)… In the investing world, the coefficient of variation allows you to determine how much volatility (risk) you are assuming in comparison to the amount of return you can expect from your investment…”.

In this case the calculation used is as follows:

Coefficient of Standard Deviation Variation = Average Five Year Dividend Payout

The lower CVAR indicates that Tier 1 carries the lowest risk for the average percentage payout. The findings also indicate that that Tier 1 scored second highest in terms of dividend payout roughly retaining 20% of earnings meaning the dividend policy is fairly aggressive. This particular statistic compliments the earnings yield indicating that Tier 1 exhibits higher returns on equity as it earns a high yield despite retaining far less than Tier 4 and 6. Tier 1 finally ranks third highest average annual returns for the five year period and based on its composition largely comprises of companies in the Industrial & Allied Sector. Growth companies comprise a large population of the best performing tiers; i.e., Tier 5 and 6 (in terms of average annual return) and more likely the beneficiaries of high investor confidence after the euphoric 2002 elections. The results above do not much exhibit much correlation between the average annual returns and the average dividend yield. The return variance between Tier 1 and Tier 2 would indicate that a higher yield attracts better returns than a higher payout ratio.

Dividend Yield vs 91 day T-Bill

*Data set for average 91 day T-Bill Rate included the following: <2003; 1.40%>, <2004; 8.30%>, <2005; 8.14%>, <2006; 5.83%>, <2007; 6.87%> Source: Economic Survey 2008

Taking into account the with-holding (final) tax on local residents the Tier 1 yield drops to 6.00% which still remains a good alternative as an equity income fund to the 91 day T-bill (risk free) rate



THEME II: REINVESTMENT OF DIVIDENDS Long Term Returns and Inflation A characteristic that attracts investors to short term government papers is the ability to maximize returns by earning compounded returns on reinvested income. We undertook another exercise where we aimed to look at the long term benefits of investing for dividends by using a 10 year data set to examine the long term returns on the paycheck portfolio (a ten year investigation was chosen because getting information prior to 1998 was difficult). The purpose of the exercise would have been to investigate the returns on an annual basis assuming that dividends were reinvested at the end of each year. The other assumptions made were that the stockholder would participate in all bonus and rights issues during the period and wouldn’t liquidate any shares. The results of the exercise revealed that the capital returns and total returns without reinvestment were fairly similar and represented a scenario common amongst Kenyan investors who consume their dividends. However, total returns with reinvestment yielded about 50% more in compounded returns as dividends earned more and were subject to the same corporate actions (such as bonus issues) that increased shareholders’ wealth without redeeming part of the investment. However, within the 1999 to 2002 period return growth was almost zero meaning that despite the reinvestment of dividends the portfolio would still follow the general economic trends.

*Average annual Inflation figure for 2008 relates to November 2008 Source: CCS estimates, NSE, Economic Survey 2004-2008 In September 2008 CCSfs market update we saw the return on the paycheck portfolio finally hit zero (after an impressive rally a few months earlier). We were able to recognize that the dividend counters tended to exhibit character traits of fixed income instruments where the stockholder was able to maintain his/her capital at relatively the same level while reaping tangible income. The stability in pricing was attributed to the fact that many stockholders were not willing to give up the chance of getting dividends in the future. The payment of dividends on a regular basis or fairly predictable manner meant that each counter supported the other as the respective books closure dates expired over a large span of time.



Given that inflation statistics at the time (average annual inflation for July 2008, August 2008 & September 2008 was 19.55%, 20.79% & 22.12% respectively) the portfolio would fall victim to negative real returns. This is a phenomenon that affects all fixed income securities but the dividend portfolio may have a way of overcoming this weakness. A quick investigation back 10 years reveals that the dividends paid by the paycheck portfolio grew an average rate of 16.97% per annum against the average annual rate of growth in inflation of 10.44%, thus the portfolio yielded a positive return. Beating inflation is not guaranteed and several bondholders in Kenya will assess this risk carefully before making a decision as the fixed coupons on offer remain constant. “When inflationary pressures bite and negative market perceptions prevail the need for more income you can touch & feel becomes a priority for ordinary people (particularly those with short term investment objectives)” (CCSfs market update 16 Sept).

Source: Central Bank of Kenya Apart from the inflation risk mentioned above stockholders of dividend oriented counters face considerable liquidity risk. The risk arises largely due to the stability of the shareholding. Incidentally the stocks in the paycheck portfolio have a lower free float, largely foreign owned (by multinationals) and are in their mature growth stage. A discussion paper from the Kenya Institute for Public Policy Research and Analysis mentioned the following “The trading volume results show that the activities of the secondary market were however dominated by the minority shareholders…It would therefore seem that the top shareholders controlling over 50% of company shares are inactive in the secondary market, showing preference for dividend income to capital gains. This may explain the low liquidity in the secondary market and low supply of securities for trading” (Rose Ngugi)

Trade statistics for the two portfolios and the NSE in 2008

*Only preliminary figures for turnover and volumes were available Source: NSE, CCSfs estimates

Turnover ratio is the ratio of the annual/monthly turnover to market capitalization. The higher the value the higher the transaction value.

The trading volume activity ratio (TVAR) is the ratio of the annual/monthly volume to the average number of shares outstanding. The higher the number the more active the share.



Short term dividend investors would also experience other market risks if they intend for buy a stock solely for its dividend especially when disposing it. For example “generally over the past three years the EABL share has dipped 13% the week after the ex div date” (CCSfs market update 17 Oct). Taking a look at historic five year price trends immediately following the books closure dates for most interim dividends the price decline was evident. Other counters such as Total Kenya (a high yield counter) come alive for only three months in a year between the dividend announcement date and the books closure date. The findings indicate the prices in the paycheck portfolio tend to dip. The table below examines the interim and final dividends paid by the paycheck constituent counters and the prices changes 5 days (5D) before (cum div) the books closure dates and 5 days after (ex div).

Source: CCSfs estimates The findings for final dividends, which tend to be the largest in size, indicate that recently share prices generally dipped following an ex div announcement. Many analysts argue that this should be the case as the market value corrects itself to compensate for the loss in market value as a result of distributing the cash dividend. However, it’s also likely that the demand for the shares drops as the incentive to purchase the shares is diminished. Whatever the case a historical look at dividend counters reveals that holding onto your portfolio may entitle you to some cool freebies.

Bonuses issued at the NSE - 15 year history

Source: NSE, CCSfs estimates

Taking a look at the historical issues of bonuses shares reveals that the six companies (out of over 50 listed firms at the NSE) that comprise the paycheck portfolio accounted for 20% of the recapitalization issues and testifies to their superior reserves. Most the bonus issues were capitalized from revenue reserves and would enable the holder to grow his wealth without making additions to his original investment. The following is an extract from a previous CCSfs market report. “Over the past number of years the frequency of bonus issues has increased implying that management is happy to bear the cost of issuing bonuses shares (i.e., listing & registrar fees, etc… these costs are shouldered by shareholders) as opposed to distributing cash. For example, the EABL bonus issue cost the shareholders Kes4 m in total costs, a figure that can be considered insignificant considering the company’s size. While stock dividends may have interrupted dividend policies, they have also resulted in much of the dividend growth over the last few years”. (16th September market update)



Simple Reinvestment Strategies The following is an extract of the CCSfs market report for 7th October, 2008 All this talk about dividends it would be pointless if you couldn't provide effective strategies as to what you would do with the dividend cheque. Last time we introduced the concept of the dividend reinvestment plan, a strategy a listed company or brokers can employ to ensure dividends are reinvested wisely and in a cost effective manner. While most investors prefer not to reinvest dividends, it may be in an investors’ best interest to take advantage of the opportunities in the market. I possible strategy for reinvesting dividends for small retail investors would involve reducing the impact of price fluctuations by averaging the purchase consideration. There are two common methods of averaging and are often applied in many dividend reinvestment plans globally. The two methods involve either making periodic purchases of shares or making a purchase of additional shares if the stock's price (or market index) falls. Periodic Purchases Under this plan, the investor uses his dividend money to buy additional shares of a particular stock at regular intervals. For example, the investor may decide to buy a certain number of shares either quarterly, monthly, etc... (depending on the investors preferences). The general idea is to buy the stock at regular intervals irrespective of the prevailing market value and this technique is referred to 'dollar cost averaging' in the many (American-based) textbooks. The consequence of adopting this strategy is that over time a buyer may benefit from a lower average cost per share if they think that market prices generally will decline over time. The table below is an example of how this concept can be applied. Taking a simple example, if Ksh300,000 was invested in the 'paycheck' portfolio approximately Ksh12,541 worth of dividend cheques would have been available by 5th September, 2008 (according to company announcements); i.e., this assumes that investors would have all the dividend cheques paid from final dividend for 2007, interim dividend from East African Breweries and the first interim dividend from British American Tobacco in 2008. Taking into account postage complications and time for banking the cheques, the funds for reinvestment would realistically be available by 19th September, 2008. So if an investor decided to invest the Ksh12,541 in KCB Group starting on 19th September, 2008 and purchasing 100 shares after every two trading days then the average cost per share would be Ksh26.31 versus Ksh26.75 on 19th September, 2008.

Source: CCSfs, NSE Benefits of strategy

• On 19th September, 2008 - 400 shares bought at Ksh26.75 resulting in a Ksh10,700 capital outlay • Over four trading periods (two trading periods apart) - 400 shares bought at Ksh26.31 resulting in a

Ksh10,524 capital outlay

Therefore a saving (extremely small saving) would materialize. However, the strategy can back-fire if over the trading periods the average cost per share rises due to a market rebound. This particular strategy would be effective if a clear price trend could be established and the counter displayed low volatility.



Averaging Down To counter the drawbacks of the previous plan, in this case an investor buys shares only if the price declines or a major market indicator indicates that the share will drop. In the example below, we assume that we are still investing the Ksh12,541 but this time in a more volatile growth share. In this case a portfolio manager may have concluded that the NSE index had begun to stabilize between 22nd September, 2008 and 26th September, 2008, but the index continued to slide. The portfolio manager then decides that given the current trend there might be an opportunity to buy Access Kenya at a lower average cost in the following week. The table below highlights the savings on purchasing Access Kenya the week after a trend in a major market index has been identified.

Source: CCSfs, NSE

Source: CCSfs, NSE In the above case the saving was sufficient to even cover the stock brokerage cost. The 'smart alec' (no pun intended), talented, technical analysts at many of the Kenyan investment banks also employ more graphical means for identifying price trends with a view of enabling them to accumulate stock by taking advantage of short term price fluctuations. These technical analysts attempt to predict the future movement of highly volatile counters such as Equity Bank by predicting patterns such as reversals (graph 1) or ascending triangles (graph 2) that indicate that the stock may appreciate in the future. The portfolio manager then decides that given the current graphical patterns there might be an opportunity to buy Equity Bank now in anticipation of a trend reversal or bullish run in the future. In this case we can assume that the investment was Ksh3,000,000 (to afford the share) so that the dividend being reinvested was Ksh125,410. The table on page 12 highlights the savings on purchasing Equity Bank the week after predicting a future trend.

Source: CCSfs, NSE



Source: CCSfs, NSE

In the above case the saving was sufficient to cover the stock brokerage cost. It is interesting to note that in all the above scenarios we were using dividends from the paycheck portfolio to make purchases in the growth portfolio. This means an investor can now have a portfolio with the combined characteristics of high growth and income.

So far we have restricted all our reinvestment strategies to our local market because we have the capacity to understand them better; however, there are some regional markets that offer higher dividend yields than Kenya. Below are a few examples of selected yields available as at 31st December, 2007 within selected regional markets.

Source: JSE

Source: Dar es Salaam Stock Exchange (DSE)

Source: Lusaka Stock Exchange (LUSE)

Source: Uganda Securities Exchange (USE)

A drawback to reinvesting in a foreign market is that you’ll have to rely on foreign expertise to base your decisions on. It is advisable that before you enter any market you should be aware of possible risks, for example:

• We have all seen what damage inflation and currency2 risk has done to foreign investors in Kenya particularly those who invested in Safaricom, so one has to have a remedy to counteract such risks.

• Countries such as South Africa and Zambia still face a high political and economic risk (in that order) as a result of regime change and the slump in the commodities (largely metals) market globally.

• Closer to home Ugandan investors face liquidity risks due to low free float at the USE while investors in Tanzania face transaction risks resulting from strict rules on foreign participation and exchange controls.

2 In a final report to investors dated 29/12/2008, fund managers at Tweedy, Browne Fund Inc acknowledged they had made a capital gain in 2008 solely due to forward currency contracts to protect their shareholders from currency fluctuations in foreign markets.



THEME III: EQUITY INCOME FUNDS Given the current trends in the market, institutions such as pension funds in Kenya who invest about 20% of their funds in the stock market are in crisis while those holding cash at the bank are effectively losing money in real terms to inflation. Equity income funds may be a viable option for income seekers that is of medium risk on the risk pyramid and can be structured to provide an above average (rising) level of return in the long term. The idea has been tested through the Dogs of the Dow strategy as well as the Tweedy Value Funds, but the problem may be finding the right model to structure such a fund. It is possible to construct a fund based on the NSE 20 Share Index which according to a study done in 1992 by Professor J. H. Kimura has a “correlation coefficient3 of 0.91 to the market capitalization meaning that it captures over 80% of all value movements on the entire Nairobi Stock Exchange”. However, the dividend profile of the main NSE Index has changed as a result of the recent equity boom.

*All NSE Index values above are in Kenya Shillings Billion (Ksh1 b = $13 m), Source: NSE, CMA Annual Report 2001, CCSfs estimates The five year equity boom that began in August 2003 stemmed from the shift in the Government of Kenya’s monetary policy. Borrowing a leaf from the Economic Survey 2004 “the capital market increased activity can be explained by improved investor optimism and preferred capital gain return relative to the falling risk free treasury bill rates”. Indeed the NSE Index earnings yield for 2003 was higher than the 91 day T-bill rate providing evidence that the risk premium was adequate compensation for institutional investors willing to migrate from other asset classes (during 2003 the Index rose 100%, the highest annual increase since 1994). Since 2003 the yield profile of the Index has deteriorated as payout ratios dropped. Since 1992 the index has been revised six times and more recently many firms with increasingly conservative dividend policies have been incorporated into the main market index. The other index that is geared toward capturing the market is the AIG (East African) 27 Share Index that includes dividends in its formulation. Despite the Index being market capitalization weighted (while the NSE Index is equally weighted) the correlation between the two indices is approximately 0.935 (according to CCSfs estimates). Perhaps the best strategy would be to design an equity income fund based on the yield profile as was created in the exercise on page 6 to ensure that you’d be able to effectively calculate its risk and outcome as well as regulate its composition. However, as was mentioned in the AIG Investment Presentation the usefulness of using an index fund is the ability to use the index “as a benchmark for evaluating performance”. Irrespective of the benchmark used equity income funds may be your most practicable avenue for avoiding the stock appreciation drought expected in 2009 as the world enters into recession. The tables on pages 14 and 15 illustrate the simple criterion used to construct and track a model portfolio; however, no technical or fundamental approach was adopted in its design. 3 Professor J.H.Kimura based his findings on data collected between 1974 and 1990 and constructed a market capitalization index that was plotted against the NSE Index. The purpose of the study was to design an index of 20 firms to map the stock markets’ performance

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Dividend 5 Year Avg.

1 Qtr 2 Qtr Half Year 3 Qtr Revenue Profit Payout Annual Return 3 Years 5 Years

Access Kenya Small Cap. Commercial - - 47% - 53% 172% 36% - - -

Scangroup Small Cap. Commercial - - 36% - 58% 23% 35% - - -

Diamond Trust Bank Small Cap. Financial 28% 38% 34% 29% 56% 42% 30% 55% 399% 612%

Equity Bank Medium Cap. Financial 81% 306% 196% 138% 73% 151% 29% - - -

Kenya Commercial Bank Medium Cap. Financial 64% 74% 69% 69% 26% 22% 47% 64% 319% 762%

NIC Bank Small Cap. Financial 30% 46% 38% 52% 21% 63% 31% 53% 285% 680%

Athi River Mining Small Cap. Industrial - - 23% 23% 49% 64% 29% 60% 301% 524%

East African Cables Small Cap. Industrial 44% -16% 13% 71% 70% 32% 49% 124% 166% 3040%

Average: 49% 90% 57% 70% 51% 71% 36%

Total ReturnsAnnual Growth in

Company Cap. Size Sector

Interim EPS Growth in 2008

**SSccaannggrroouupp aanndd EEqquuiittyy BBaannkk wweerree lliisstteedd iinn 22000066 wwhhiillee AAcccceessss KKeennyyaa wweenntt ppuubblliicc iinn 22000077.. AAnnnnuuaall rreevveennuuee aanndd pprrooffiitt ggrroowwtthh rreeffeerrss ttoo tthhee 22000077 ffiinnaanncciiaall yyeeaarr SSoouurrccee:: RReessppeeccttiivvee ccoommppaannyy iinntteerriimm ffiinnaanncciiaall ssttaatteemmeennttss ((aallll iinntteerriimm rreessuullttss aarree uunnaauuddiitteedd)),, CCCCSSffss RReesseeaarrcchh eessttiimmaatteess

• The portfolio represents firms with a recent history of rewarding stockholders with higher stock returns but have lower payout ratios. • The portfolio leans more toward the financial sector, includes a number of newly listed firms and exhibits high quarterly EPS growth. • The firms in the portfolio are largely owned by Kenyans (by local individuals than firms) and generally have a higher level of float. • The portfolio is over diversified to reflect the high risk profile attached to some firms that have not stood the test of time on the NSE. •• ARM, KCB and Scangroup represented the anchoring stocks that were meant to stabilize the portfolio against the other volatile counters.

IINNTTRROODDUUCCIINNGG TTHHEE MMOODDEELL PPOORRTTFFOOLLIIOOSS:: PPAAYYCCHHEECCKK PPOORRTTFFOOLLIIOO ((DDIIVVIIDDEENNDD OORRIIEENNTTEEDD))

1 Qtr 2 Qtr Half Year 3 Qtr Revenue Profit Payout Growth

Nation Media Group Small Cap. Commercial - - 11% - Stabilization 21% 39% 77% 32%

Standard Chartered Bank Medium Cap. Financial 23% -19% 0% 4% Stabilization 21% 34% 92% 13%

Bamburi Cement Medium Cap. Industrial - - 29% - Hybrid 34% 38% 86% 5%

British American Tobacco Small Cap. Industrial - - 5% - Stabilization 21% 15% 112% 17%

East African Breweries Large Cap. Industrial - - - - Hybrid 26% 23% 73% 86%

Total Kenya Small Cap. Industrial 22% 179% 113% 85% Residual 13% 8% 83% 9%

Average: 32% 23% 26% 87% 27%

5 Year Avg. Dividend

Company Cap. Size SectorDividend

PolicyInterim EPS Growth in 2008 Annual Growth in

**AAnnnnuuaall rreevveennuuee aanndd pprrooffiitt ggrroowwtthh rreeffeerrss ttoo tthhee 22000077 ffiinnaanncciiaall yyeeaarr eexxcceepptt ffoorr EEaasstt AAffrriiccaann BBrreewweerriieess wwhhoossee rreessuullttss rreefflleecctt tthhee 22000088 ffiinnaanncciiaall yyeeaarr SSoouurrccee:: RReessppeeccttiivvee ccoommppaannyy iinntteerriimm ffiinnaanncciiaall ssttaatteemmeennttss ((aallll iinntteerriimm rreessuullttss aarree uunnaauuddiitteedd)),, CCCCSSffss RReesseeaarrcchh eessttiimmaatteess

• The dividend portfolio represents companies with a long history of paying regular dividend income or high yielding dividend income. • It leans more toward the industrial sector and all counters have been in the NSE 20 Index for over 15 years (Total was replaced in 2008). • The counters in the portfolio have a lower free float & total 3 year return and are owned largely by foreigners (i.e., multinationals). • The portfolio consists of fewer firms (only 6) that are considered to be highly stable, well-run and have a reliable profit history. •• Total Kenya and BAT represent the anchoring stocks that were meant to stabilize the portfolio (make less volatile) while offer good returns.

- 15 –

SSIIMMPPLLEE TTRRAACCKKIINNGG OOFF TTHHEE TTOOTTAALL RREETTUURRNNSS OONN AANNYY MMOODDEELL PPOORRTTFFOOLLIIOO TTHHAATT YYOOUU CCRREEAATTEE

Total Total

02-Jan-08 31-Dec-08 Gain Return 1st Payment Ex Div Date Payments Ex Div Date Dividends Income Return

1 Access Kenya 120,000 115,814 (4,186) -3% 1,591 09-May-08 0 1,591 (2,595) -2.2%

2 Scangroup 120,000 110,442 (9,558) -8% 3,632 20-May-08 0 3,632 (5,926) -4.9%

3 Diamond Trust Bank 120,000 89,348 (30,652) -26% 1,735 30-May-08 0 1,735 (28,917) -24.1%

4 Equity Bank 120,000 149,787 29,787 25% 1,617 04-Apr-08 0 1,617 31,404 26.2%

5 Kenya Commercial Bank 120,000 113,919 (18,181) -14% 2,902 27-Mar-08 0 2,902 (15,279) -11.6%

6 NIC Bank 120,000 84,194 (35,806) -30% 1,471 03-Apr-08 460 12-Sep-08 1,931 (33,876) -28.2%

7 Athi River Mining 120,000 116,774 (3,226) -3% 1,532 28-May-08 0 1,532 (1,694) -1.4%

8 East African Cables 120,000 74,118 (45,882) -38% 2,414 21-Mar-08 0 2,414 (43,468) -36.2%

960,000 854,396 (117,704) -12% 16,894 460 17,353 (100,350) -10.3%

1 Nation Media Group 160,000 148,645 (11,355) -7% 3,677 16-May-08 1,471 29-Aug-08 5,148 (6,206) -3.9%

2 Standard Chartered Bank 160,000 136,898 (23,102) -14% 4,064 03-Apr-08 4,064 4 Sep / 4 Dec 8,128 (14,973) -9.4%

3 Bamburi Cement 160,000 137,500 (22,500) -14% 396 28-Mar-08 2,533 05-Sep-08 2,929 (19,571) -12.2%

4 British American Tobacco 160,000 158,788 (1,212) -1% 12,091 22-Apr-08 5,182 15-Aug-08 17,273 16,061 10.0%

5 East African Breweries 160,000 142,222 (17,778) -11% 2,252 28-Mar-08 5,301 09-Oct-08 7,553 (10,225) -6.4%

6 Total Kenya 160,000 167,869 7,869 5% 12,459 28-May-08 0 12,459 20,328 12.7%

960,000 891,923 (68,077) -7% 34,939 18,552 53,491 (14,587) -1.5%

Interim Dividends ProposedDividends ProposedInvestment Value Paper

*All figures above are in Kenya Shillings, Source: CCSfs estimates

KEY ASSUMPTIONS 1. The initial investment was Ksh1 m (18k for brokerage commissions) and was to be spread equally amongst the counters in each portfolio 2. Dividend income was recorded on the date immediately after the books closure date 3. Withholding tax rate applied on dividend income was 5% of the total disbursement 4. Investors participated in all corporate actions and they were recognized at their respective books closure dates

COMMENTARY 1. The last time we observed the two portfolios (refer to the CCS market report for 16th September 2008) the paycheck portfolio had been

outperformed on a capital growth basis but had come up on top in total returns (due to dividends that had been paid at the time). However, by the years’ end the paycheck portfolio dominated on both fronts with dividend income meeting up to 78% of the paper loss

2. East African Cables, NIC Bank and Diamond Trust Bank were the worst performers; but, Equity Bank provided the much needed balance 3. The growth portfolio was purposely over-diversified (covering the sectors more broadly) to limit pricing tendencies inherent in any

particular sector. The high interim EPS were expected to support prices every quarter as investors reacted to better-than-expected earnings 4. The dividend portfolio performed better overall as dividend income supplemented the decline in market value of the portfolio. The biggest

dividend contributors were Total Kenya and BAT (who incidentally have the highest yielding dividends) and Standard Chartered Bank contributed the most payments (comprising 2 interims and 1 final). REMEMBER: All dividends were paid at the discretion of the Board.



Conclusions

o Dividend oriented stocks outpace growth portfolios when times get rough and are the glue that keep your returns positive because of the income they provide. Whereas you can only rely on supernormal capital growth during booms, dividends are designed to last in any weather.

o Dividend portfolios operate much like hybrid portfolios (that mix equity and bonds, for

example) ensuring stability through regular income while achieving capital appreciation at above market average rates.

o We have seen that certain types of high dividend yield portfolios can offer above

average returns while maintaining a low risk profile. o Research has shown that long term investment in a dividend portfolio may yield gains

within a high inflation environment insofar as there is dividend growth.

o We discovered that dividend reinvestment is a useful strategy in growing capital and enables an investor to earn compounded returns.

o Equity income fund may possess the key to surviving chaotic market and can be

customized to beat returns from the major indexes.

o At a time when markets are falling and recessions are around the corner it’s a good idea to invest in companies that hold a large amounts of cash. Companies with stable dividend policies hold adequate cash and that is often the reason many pension funds are attracted to them (it is interesting to note that other than the holding companies, the state run pension fund (NSSF Board of Trustees) has dipped its fingers into all the counters in the paycheck portfolio excluding Total Kenya)

- 17 -

APPENDIX

Introduction to the NSE main market Index

Source: NSE

Composition of the High Dividend Yield Tiers (on page 6)

Tier 1 British American Tobacco, Total Kenya, Rea Vipingo Plantations, East African Cables, East African Breweries Tier 2 Standard Chartered Bank Kenya, Carbacid Investments, BOC Kenya, Unilever Tea, Barclays Bank Kenya Tier 3 Mumias Sugar, Nation Media Group, Jubilee Holdings, National Industrial Credit Bank, Bamburi Cement Tier 4 Car & General, Kenya Airways, Crown Berger, Sameer Africa, East African Portland Cement Tier 5 Centum Investments, Kenya Commercial Bank, Pan African Insurance, Diamond Trust Bank, Sasini Tier 6 Athi River Mining, TPS Eastern Africa, CFC Stanbic Bank, CMC Holdings, Marshalls (East Africa) Tier 7 Kenya Oil Company, Kenya Power & Lighting, Kakuzi, Standard Group, Housing Finance

Source: NSE, CCSfs estimates

Corporate Actions for the Paycheck Portfolio influencing Long Term Returns (on page 7)

Year Company Type Ratio Price Books Closure2000 Standard Chartered Bank Bonus Issue 1:2 20-Mar-00

British American Tobacco Bonus Issue 1:3 20-Mar-002001 Total Kenya Bonus Issue 1:2 30-Apr-012002 Total Kenya Rights Issue 2:3 18.00 04-Jan-02

Nation Media Group Bonus Issue 1:2 24-May-022004 Standard Chartered Bank Bonus Issue 1:10 25-Mar-04

East African Breweries Bonus Issue 1:5 06-Oct-04East African Breweries Share Split 5:1 26-Nov-04

2005 Nation Media Group Bonus Issue 1:3 13-May-052007 East African Breweries Bonus Issue 1:5 12-Oct-072008 Nation Media Group Share Split 2:1 25-Jul-08

Source: NSE

- 18 -

Composition of the NSE 20 Share Index and Amendments Since 2007

*Market Capitalization (MKT CAP) and P/E was recorded as at 31st December, 2008 - Source: NSE

Composition of the AIG (East Africa) 27 Index

Agriculture Sector Commercial Sector Financial Sector Industrial SectorSasini Access Kenya Barclays Bank Athi River Mining

Rea Vipingo CMC Holdings CFC Bank Bamburi CementKenya Airways Diamond Trust Bank BAT KenyaNation Media Housing Finance EA Breweries

TPS Serena KCB EA CablesSafaricom ICDC Investments KPLCScangroup NIC Bank Kengen

Standard Chartered Mumias SugarKenya RE Kenol

Source: AIG Investment Kenya

CCSfs Research – www.ccsfinancialsolutions.com - 19 -

EAST AFRICAN BREWERIES:SHARE MOVEMENT (Sept 08–Jan 09)

Source: NSE Pricelist, CCS Financial Solutions, www.eabl.com

TRADING HIGHLIGHTS

Source: Company Reports, NSE Pricelists Key Share Information Sector Beverage Latest Share Price Kes 139.00 52 Week Low – High 107 - 220 Market Capitalization Kes 110 bn Shares Issued 791 mn Foreign Shareholding 53.54% Book Value/Share Kes 25.27

Market (P/E) 13.94 Industrial (P/E) 13.09 Company (P/E) 14.55

Price/Book 5.39 Free Float 45.20% Support (Buy) Kes 130.00 Resistance (Sell) Kes 165.00 2008 EPS 9.55 2008 DPS 8.05 Earnings (%) Up 23%

Statistics as at 30th June 2008 Div. Yield 5 yr Avg. 4.20% Div. Growth 5 yr Avg. 46% Consecutive Div. Rise 13 Years Total Return-12 Mnths 52% Total Return-3 Years 61% Total Return-5 Years 542%

Shareholding Structure

Diageo Kenya 42.82% Board of Trustees NSSF 4.69% Diageo Holdings Netherlands BV 4.55% Guiness Overseas Ltd 2.61% Other Shareholders 45.33%

Year End Jun-08

Div Value 5.65

Div Type Final

Cum Div 29-Aug-08

Ex Div 09-Oct-08

Trading Summary EABL counter shows the true impact dividends have on share price stability. Almost immediately after its final (which was 283% of Ksh2.00 par value) the share tanked losing more than 30% of its value within a span of 20 days. However, this resulted in an RSI value lower than 2 indicating that by the end of October 2008 it had been grossly oversold – the market quickly corrected itself the following week. Currently no buy signals have been observed.

Company Prospects o Company was expected to increase marketing spend to maintain

market share and establish new brands such as Alvaro being tested in the Kenyan market by Diageo Plc

o Recent capital investments include a SAP platform and additions to PPE to increase cost efficiency to enable the high profit margins. EABL has a good source of financing & low capex spend, so dividends are secure

o Mainstream brands expected to perform well while more emphasis is placed on emerging brands-securing more markets regionally & export contracts abroad to reduce exposure to Kenyan economy

o Building bottling capacity to diversify business and expand production o EABL is still a mature firm with a large market share, facing low

competitive pressure and thus not aiming to retain much of its earnings o Focus in future will be on implementing key marketing initiatives

managing inflationary and fuel pressures, procuring low cost inputs and competing effectively for the share of the consumers wallet

Key Dividend Statistics in Kenya Shillings (Exchange Rate ‐ US$ 1 = Kes 79.7567 )

Year Ended 30th June 2004 2005 2006 2007 2008

Earnings Yield 10.47% 6.49% 5.68% 6.35% 5.84%

Dividend Yield 6.22% 4.03% 4.10% 5.26% 4.92%

Price to Earnings Ratio 9.6 15.4 17.6 15.7 17.1

Dividend Payout 59% 62% 72% 83% 84%

Interim Dividend Per Share (Kes) 0.52 1.25 1.46 1.83 2.40

Final Dividend Per Share (Kes) 2.37 2.50 3.46 4.58 5.65


BAMBURI CEMENT: SHARE MOVEMENTS (Sept 08 – Jan 09)

Source: NSE Pricelist, CCS Financial Solutions, www.bamburicement.com

TRADING HIGHLIGHTS

Source: Company Reports, NSE Pricelists

Shareholding Structure Fincem Holdings 29.30% Kencom Holdings 29.30% Board of Trustees NSSF 16.68% Bamcem Holdings 13.78% Other Shareholders 10.94%

Year End Dec-08

Div Value 3.20

Div Type Interim

Cum Div 07-Aug-08

Ex Div 05-Sep-08

Following the payment of its interim dividend (64% of Kes5.00 Par Value) the share dropped moderately by 7%. The management had already warned that they would prioritize reinvesting cash in the business in June so investors slowly lost interest as they knew no second interim dividend was going to be offered. Among the counters in the paycheck portfolio, Bamburi has the least appealing dividend profile, but due to the Lafarge shareholding (represented by Fincem, Kencom & Bamcem) investors can be assured that the French multinational will continue to repatriate profits (in the past dividends have been paid from reserves severally when earnings have not been sufficient). A big problem is the lack of float (liquidity) as only 11% of shares are traded.

Company Prospects

As was evident from their half year earnings statement the cement market leader will continue to post higher profits in the future. The demand for cement still remains high within the region and the company is looking to expand its current capacity to meet this demand. The company has a low gearing ratio so the final dividends to shareholders may not be comprised in funding the expansion; but, 2008 will see a lower payment consisting of only 1 interim & 1 final dividend (a decision was made to funded capex internally)

Since 2002 Bamburi has paid $152m dividends & the market cap. has grown from $390m to $1.0bn. Key to Bamburi’s future is its ability to reduce its production costs. Whereas items such as electricity & transport costs may be out of their hands, the discovery & exploration of limestone / coal deposits should help in derive crucial savings in clinker production and coal imports.

Year Ended 31st December 2004 2005 2006 2007 HY 2008

Earnings Yield 4.28% 4.70% 4.06% 4.82% 5.40%

Dividend Yield 5.54% 4.51% 3.10% 2.92% 1.64%


1st Interim Dividend Per Share (Kes) 1.12 1.80 2.00 2.00 3.20

2nd Interim Dividend Per Share (Kes) 5.00 3.50 2.00 3.50

Final Dividend Per Share (Kes) ‐ ‐ 1.50 0.50

Key Share Information Sector Construction Latest Share Price Kes 160.00 52 Week Low – High 155 - 205 Market Capitalization Kes 58 bn Shares Issued 363 mn Foreign Shareholding 72.38% Book Value/Share Kes 44.07


Price/Book 3.63 Free Float 10.94% Support (Buy) Kes 150.00 Resistance (Sell) Kes 200.00 2007 EPS 9.91 2008 DPS 5.28 HY 2008 Earnings (%) Up 29%

Statistics as at 30th June 2008 Div. Yield 5 yr Avg. 3.61% Div. Growth 5 yr Avg. 20% Consecutive Div. Rise 2 Years Total Return-12 Mnth 4% Total Return-3 Years 64% Total Return-5 Years 181%


STANDARD CHARTERED BANK: PRICE CHANGE (Sept 08–Jan 09)

Source: NSE Pricelist, CCS Financial Solutions, www.standardchartered.com/ke

TRADING HIGHLIGHTS


Key Share Information Sector Banking Latest Share Price Kes 164.00 52 Week Low – High 147 - 236 Market Capitalization Kes 45 bn Shares Issued 272 mn Foreign Shareholding 73.81% Book Value/Share Kes 41.59

Market (P/E) 13.94 Financial (P/E) 16.58 Company (P/E) 13.51

Price/Book 3.94 Free Float 25.16% Support (Buy) Kes 150.00 Resistance (Sell) Kes 180.00 2007 EPS 12.14 2008 DPS 10.00 HY 2008 Earnings (%) Up 0.4%


Shareholding Structure

Standard Chartered Holdings (Africa) 73.81% Kabarak Ltd 1.03% Board of Trustees NSSF 0.69% KCB Nominees – A/C 744 0.51% Other Shareholders 23.96%

Year End Dec-08

Div Value 2.50

Div Type Interim

Cum Div 10-Nov-08

Ex Div 03-Dec-08

Trading Summary

After the ex div date on the 1st interim dividend of Ksh2.50 on 4th September, 2008 the share predictably dipped by over Ksh15.00; however, lucky the board announced a 2nd interim dividend in November that temporarily halted the decline. Curiously between cum div and ex div date in December the share continued to dip in line with the market index. The lack of support may have resulted from capitulation as extremely low volumes were recorded in November 2008. Currently the share is trading at par with the 30 day SMA.

Company Prospects

o Since a Kenyan CEO came on board the shift in focus has resulted an expanded loan book which may result in increased investment. Unless externally funded the expansion strategy in 2009 may reduce the DPS

o Adoption of modern technology (software) and banking equipment to speed up modernization process.

o Competition for deposits will remain high with the domestic banking sector meaning interest margins may continue taking a hit.

o Liquidity problems in the financial system may persist a bit longer, but as smaller regional banks struggle to keep up, opportunities to acquire new businesses may arise.

o Corporate financing arrangements to accelerate as Kenya become the financial hub of East Africa.

o Since 2002 the bank has paid $169m in dividends & the market cap. has grown from $309m to $761m. Final dividend grew at 24% per year



Earnings Yield 4.56% 6.91% 5.63% 6.21% 5.66%

Dividend Yield 4.40% 5.75% 4.94% 4.87% 2.77%



2nd Interim Dividend Per Share (Kes) 2.20 2.20 2.20 2.50 2.50

Final Dividend Per Share (Kes) 2.10 3.10 4.10 5.00


BRITISH AMERICAN TOBACCO: PRICE CHANGE (Sept 08–Jan 09)

Source: NSE Pricelist, CCS Financial Solutions, www.bateac.com

TRADING HIGHLIGHTS


Shareholding Structure Molensteegh Invest B.V. 60.00% Board of Trustees NSSF 13.24% Barclays (K) Nominees A/C 9296 2.12% Old Mutual Insurance Company 0.88% Other Shareholders 23.76%

Year End Dec-08

Div Value 4.50

Div Type Interim

Cum Div 21-Jul-08

Ex Div 15-Aug-08

The counter has been the maverick within the paycheck portfolio and sets its own trends. Its dividend payment was paid long before the last quarter of 2008 started; however, it was the absence of the 2nd interim dividend that sent signals that the previously aggressive dividend policy could not be sustained. BAT Kenya had paid worth over Ksh1.5 b ($22 m) in just 5 months which had probably taken its toll on the cashflows.

Company Prospects

The company consistently receives negative press from both media and lobby groups on account of the nature of the product. Government has persistently attacked BAT through excise duty increases, changes in by laws, Tobacco legislation that affects packaging, branding & marketing. Although the legis-lation was welcomed by BAT it may have adverse effects on operating costs. Demand for their products locally is still inelastic and covers both upper and lower end market. They enjoy a large market share and the Kenyan lifestyle encourages consumption. BAT has superior free cashflows (most of which are distributed through dividends). Through other BAT companies in the region they are able to acquire raw materials, distribute and market their products. Contract manufacturing has opened more export opportunities and improved their profile internationally (the dollar exchange rate moved in their favour during the second half of 2008). They have the best credit ratings in Kenya and access to a Sh2b ($29m) unsecured borrowing facility. Primary motive for buying BAT shares for most investors is the dividend, which are high yielding due to the stable share price. Since 2002 BAT has paid $110m in dividends. Key Dividend Statistics in Kenya Shillings (Exchange Rate ‐ US$ 1 = Kes 79.7567 )


Earnings Yield 5.08% 6.84% 5.99% 8.24% 10.33%

Dividend Yield 6.93% 6.19% 5.99% 10.13% 2.94%



Interim Dividends Per Share (Kes) 7.50 3.50 ‐ 2.00


Key Share Information Sector Tobacco Latest Share Price Kes 135.00 52 Week Low – High 128 - 180 Market Capitalization Kes 14 bn Shares Issued 100 mn Foreign Shareholding 61.05% Book Value/Share Kes 44.33



Statistics as at 30th June 2008 Div. Yield 5 yr Avg. 7.45% Div. Growth 5 yr Avg. 17% Consecutive Div. Rise 1 Year Total Return-12 Mnths -2% Total Return-3 Years -11% Total Return-5 Years 134%


NATION MEDIA GROUP: SHARE MOVEMENTS (Sept 08 – Jan 09)

Source: NSE Pricelist, CCSfs Research, www.nation.co.ke

TRADING HIGHLIGHTS


Shareholding Structure Aga Khan Fund for Econ. Dev. 44.73% Mr Amin Nanji Juma 8.17% Board of Trustees NSSF 4.23% Nima Investments 1.83% Other Shareholders 41.04%

Year End Dec-08

Div Value 1.50

Div Type Interim

Cum Div 20-Aug-08

Ex Div 29-Aug-08

After the ex div date for interim dividend the share plummeted roughly Ksh40 or 25% and has displayed quite a large amount volatility compared to its counterparts in the paycheck portfolio. The share has exhibited large price spread of up to Ksh15 to Ksh20 during a trading period and trades at a high P/E of 18.85x. Following the share split it was expected that volumes would rise, however, volumes became thinner as the year end closed in. Company Prospects

The holding company runs a network of subsidiaries that have their hands dipped in all sorts of media related activities and is estimated to control over 70% of the print media market share. The company’s operations are not heavily geared and the company’s capital expenditure commitments aren’t very high. Of particular emphasis this year will be the ability to go digital through online publications. NMG had launched “a Digital Division that will utilize content from the print, television and radio divisions for the digital platform. This would then be repackaged to make it available to a wider audience on the internet and via mobile phones” (Source: 2007 Annual Report). One of the key cost components has been the inventory expensed; but, good investment in technology should mitigate this. In times when the company has made profits the dividend policy has been adjusted to introduce special dividends, which means that future earnings growth may play a role in the payout ratio. Since 2002 NMG has paid $40m in dividends & the market cap. has grown from $72m to $343m-Final dividend has grown by 19% per yr.



Earnings Yield 6.64% 6.33% 4.37% 4.78% 4.18%

Dividend Yield 3.32% 3.78% 4.77% 3.29% 0.89%


Interim Dividend Per Share (Kes) 0.38 0.50 1.00 1.50 1.50

Special Dividend Per Share (Kes) ‐ ‐ 2.50 ‐


Key Share Information Sector Publishing Latest Share Price Kes 144.00 52 Week Low – High 100 – 197 Market Capitalization Kes 21 bn Shares Issued 143 mn Foreign Shareholding 44.73% Book Value/Share Kes 26.20

Market (P/E) 13.94 Commercial (P/E) 10.39

Company (P/E) 18.85 Price/Book 5.50 Free Float 45.27% Support (Buy) Kes 130.00 Resistance (Sell) Kes 160.00 2007 EPS 7.64 2008 DPS 5.25 HY 2008 Earnings (%) Up 10.6%



TOTAL KENYA: SHARE MOVEMENTS (Sep 08 – Jan 09)

Total Kenya: Bollinger Bands and Relative Strength Index (September 2008 – January 2009)

Source: NSE Pricelist, CCS Financial Solutions, www.total.co.ke

Total has been sending buy signals the past week as shown above ahead of its march earnings announcement where it is expected to surpass 2007 earnings by 80%. Assuming that the 2008 div. policy is maintained at current prices it would yield 7%. However, the 2009 financial year will be hard for the oil marketer as its general trade (that includes LPG & supply of furnace oil) and the aviation businesses are expected to suffer. Its lucrative contract with Triton Petroleum to supply KenGen’s EPPs generators is also sticky. Total has no long debt & capex spend may not affect payout; a proposal by Total Outre Mer (with a 72% stake) to buy Caltex may see dividend rise, used as financing Key Dividend Statistics in Kenya Shillings (Exchange Rate ‐ US$ 1 = Kes 79.7567 )


Earnings Yield 8.71% 7.74% 7.33% 8.74% 21.46%

Dividend Yield 6.61% 6.37% 6.60% 7.30%



TRADING HIGHLIGHTS


Key Share Information Sector Oil & Gas Latest Share Price Kes 33.00 52 Week Low – High 24.0 – 35.5 Market Capitalization Kes 5.8 bn Shares Issued 175 mn Foreign Shareholding 78.29% Book Value/Share Kes 26.13



Statistics as at 30th June 2008 Div. Yield 5 yr Avg. 6.73% Div. Growth 5 yr Avg. 13% Consecutive Div. Rise 0 Years Total Return-12 Mnths 7% Total Return-3 Years -19% Total Return-5 Years 57%



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