My Favourite Dividend Stock In NSE Insurance Index
Best Insurance Dividend Stocks to Buy In Nigeria Stock Market – Learn How To Pick Penny Stocks In Insurance Sector, Spot Promising Shares That Will Pay More Dividend.
Spotting a good dividend income stocks isn’t about the yield alone as some beginners had thought. Sure, I know dividend is the focus here and as such “high-yield” is one key metric to watch, but there are a number of checklists to consider before investing your money in such companies.
Today, I decided to screen NSE listed companies for dividend income stocks so that I would add more passive income assets to my longterm equities portfolio. After 3-4 hours of stock analysis and deep research, I discovered my next favourite dividend income stock is surprisingly in a sector I least expected, guess what? It is Custodian Investment PLC, formerly Custodian and Allied Insurance Plc.
As of this writing, the stock is selling for N5.18 and had increased by 33.16% and 43% on a YTD and 1 year respectively.
Why did I pick this insurance stock as my favourite dividend income stock? Let’s use the 6 criteria I shared on this blog to screen Custodian Investment Plc.
I had earlier stressed the key reason your search for dividend should start with yield. While it shouldn’t be too high to avoid buying stocks that are in trouble, just like Skye Bank, a lower yield below an acceptable level might mean that you are not buying at a cheap price. Your definition of cheap stock as an income investor isn’t the price you pay on nominal terms but the value you are expected to get after investing in your selected stocks.
This is why you should only buy a stock that offers a juicy dividend yield. An acceptable yield is one that is close to the CBN treasury and FGN bond of 10-12%, and I already said that a dividend stock that offers 8-10% isn’t bad.
As of this writing, Custodian Investment Plc stock sells for N5.18, the stock, after hitting a new high of N6.89, had been trending downward as investors negative sentiments on the NSE market persist.
Based on the current market price and the last dividend payout of 42k, Custodian Investment offers a yield of 8.1%.
Consistency of Dividend Payment
A great dividend rewards its shareholders, even though we might see some downtimes in the trend but the consistency of dividend payment is one pension fund managers and other institutional investors watch out.
An acceptable number of years a company must have covered in its dividend history is 7-10 years with little or no record of holding back. Custodian and Investment plc meets this standard.
In the last 5 years spanning from 2013 to 2017, the company had paid 16k, 18k, 20k, 25k, and 42k respectively.
Average Annual Dividend Growth
Consistency in dividend payment may not translate to increasing reward for shareholders. The growth trend also matters; a company might be consistent in paying a dividend but at a moderate level that isn’t attractive. To avoid de-marketing some listed stocks, I won’t mention a name here but I have seen a banking stock with falling dividend year on year for 5 consecutive periods now. Such stock, we would say, is consistent but not growing.
Growth is the only metric that would make a dividend stock more attractive to fixed income investors who want to divest from CBN Treasury or FGN bond.
From the dividend history of Custodian Investment plc, the stock has an average dividend growth of 25% which is clearly above the 10% threshold and ranks among the best in the industry.
Based on rule 72, Custodian dividend yield for shareholders who key in at the current market price could double in 3 years to 16.2%.
The biggest driver of dividend-paying stocks is the profit they make from ordinary business and increased profit comes from re-investment. Companies that don’t invest in growth might hit a roadblock and as such generate less distributable cash. This is the reason, I love stocks that pay less and re-invest more in future growth and expansion.
Custodian Investment has a historical average dividend payout of 29.25% which is less than my 40% threshold and still within an acceptable minimum level to entice shareholders who want to balance growth and cash reward.
Return on Equity Vs Debt
Custodian Investment plc has a 5-year average return on equity of 18.3% which is quite impressive. On a breakdown, the return on equity grew from 18% in 2014 to 20% in 2017 while Debt to Equity has been relatively stable at 1.2 in the last 5 years. The insurance firm has been utilizing shareholders’ fund to efficiently.
We understand that this is an insurance stock, policy liabilities is a key part of the business. This is tantamount to deposit liabilities in the banking sector.
Custodian Investment passed!
Average Free Cash Flow Growth
In as much as the dividend is driven by profit, it is paid from actual cash flow. This is the reason, you must always look at the trend of cash generated from the operation, it is only a company that has enough cash in the bank, that pays a dividend.
At the “cash generated from operation” section of the statement of cash flow as culled from investing.com, Custodian Investment plc reported a cash of N2.7b, N8.4bn, N6.8bn and N4.1bn from 2014 to 2017, invested N301m, N224m, N326m, and N439m on capital projects in the same period which leaves us with a free cash flow of N2.3, N8.17b, N6.47, and N3.66 respectively. This represents a 5-year average cash growth of 19%.
The company has enough cash to sustain dividend payment.
The trend of cash flow indicative of the fact that the company is investing in future growth, no wonder the management opted for the change of name, from Custodian and Allied Insurance to Custodian Investment Plc to reflect the next phase of growth.
In summary, Custodian Investment passed my 6 checklists! It’s a buy for longterm from my end.