Looking for an Undervalued Penny Stock in the Banking Sector?

While everyone is cautious about buying stocks in the NSE market on growing bearish sentiments, Sterlings bank’s stock seems to have shown some resistance last week as it appreciated by 6.67% to close at ₦1.60, from an opening price of ₦1.5. This might be one of the undervalued bank stocks to buy in the Nigeria stock market.

You are strongly advised to do you own research.

The upward move in the share price isn’t unconnected to the bank’s impressive Q3 results which showed revenue, interest income and profit on double-digit growth trajectory.

As of this analysis, the stock is selling for ₦1.65 with 1-year and YTD performance now at 57.17% and 48.15% respectively.

Analysis Recent Result

Results for the 9-month ended September 2018 show that interest income increased from ₦78.6 billion in 2017 to ₦93.5 billion in 2018, 18.9% growth.

Profit before tax jumped by 30%; from ₦6.5 billion in 2017 to ₦8.5 billion in 2018. Profit after tax increased by 38%; from ₦5.9billion in 2017 to ₦8.2billion in 2018.

In summary, the bank’s bottom line was largely supported by efficient utilization of customers’ deposit on loan and over 50% reduction in impairment charges. This is coming at a time other top tier banks (GTB, Zenith, UBA, FirstBank) are cutting down on their loan book which unsuprisingly affected interest income.

The bank has a Return on Equity 10%, Return on Asset of 1% while Net Interest Margin is 7%

Customer’s deposit, a measure of customers’ confidence in the bank, also grew by 5% to ₦723 billion from ₦684 billion. This also translated to increased lending to the private sector, as loan and advances to customers increased from ₦662 billion from ₦598 billion.

OPEX increased by 54% as the bank incurred more cost on administrative expenses.

Cash generated from operations on the Q3 report is ₦7.6 b (compared to a negative cash flow ₦100 billion in the previous comparable period)

Technical Analysis

Sterlings bank share price is trading for ₦1.65, above its 50-day average of ₦1.52 and 20-day moving average price of ₦1.43.

Generally, a stock is bullish on a short and long term when its share price is above 50-day and 200-day moving averages respectively.

With the price showing a recent cross above the 200-day SMA of ₦1.50, Sterlings bank might be set for an impressive long-term bullish run

undervalued bank stocks to buy

Valuation

Sterlings bank reported a 9-month EPS of 28k, which is 33% more than the EPS of 21k in the comparable period (2017).

Using an adjusted discount rate of 15%, an assumed zero growth on TTM EPS of 37k we assign a fair value of ₦2.46 to the stock, which is 49% above the current share price of ₦1.65.

Besides, the banking stock has a forward PE ratio of 4.45 which is below industry average; there is room for upside.

Market update

No update on

Recommendation

We assign a BUY rating on Sterlings bank’s stock.

About Sterlings Bank Plc

Sterling Bank PLC provides banking products and services to personal and business customers. The Bank offers services in corporate/commercial banking, retail & consumer banking, financial investments and management services, capital markets, insurance, and other financial services.

Top Gaining Stocks to Watch Closely Next Week

The NSE All-Share Index and Market Capitalization depreciated by 2.38% to close the week, November 2nd, 2018 at
32,124.94 and N11.728 trillion respectively.

Similarly, all other indices finished lower with the exception of the NSE ASeM index that closed flat.

  • NSE Consumer Goods Index (-2.72%)
  • NSE Premium Index (-3.09%)
  • NSE Main Board Index (-1.73%)
  • NSE ASeM Index (0.00%)
  • NSE 30 Index (-2.39%)
  • NSE Banking Index (-0.38%)
  • NSE Insurance Index (-2.96%)
  • NSE Consumer Goods Index (-3.25%)
  • NSE Oil/Gas Index (-7.8%)
  • NSE Lotus II (-2.81%)
  • NSE Industrial Goods Index (-4.06%)
  • NSE Pension Index (-2.86%)

Here are top gaining stocks for the week:

  • Presco Plc – The stock price increased from N53 to close the week at N59.85, 12.92%
  • Neimeth International Pharmaceutical Plc – The stock price increased from 54k to close the week at 60k, 11.11%
  • Consolidated Hallmark Insurance Plc – The stock price increased from 30k to close the week at 33k, 10%
  • Newrest ASL Nigeria Plc – The stock closed the week at N6.6, from N6 representing 10% growth in 7 days.
  • C & I Leasing Plc – The stock started the week at N2.55 and appreciated by 9.8% to close at N2.80.
  • Livestock Feeds Plc – The stock opened at 52k and appreciated to 57k, representing 9.62%.
  • International Breweries Plc – The stock price went from N31 to close the week at N33.55, 8.23%
  • Learn Africa Plc -The education stock opened at N1.10 and close the week at N1.18, 7.27%.
  • Mutual Benefits Assurance Plc – The insurance stock started the week at 28k and appreciated to 30k, 7.14%.
  • Sterlings Bank Plc – The banking stock also appreciated by 6.67% to close the week at N1.6, from the N1.5 opening price.

(Source: NSE)

Stocks to Watch:

  • Newrest ASL Nigeria Plc

The company released its Q3 results with revenue and profit jumping to the roof. Based on the 42% increase in top line and 293% growth in Q3 EPS, Newrest ASL has surpassed its 2017 full-year earnings by a wider margin.

Our TTM EPS on this stock is N1.97, which on a 15% adjusted discount rate, presents a fair value estimate of N13.

Verdicts: The stock had already risen by 10% in the last 7 days, investors might need to wait for a dip on profit taking or buy available offers at not more than N7.

Year to date, the stock is up 10.92%.

  • Sterlings Bank Plc

The bank released an impressive result with double-digit growth; Q3 revenue grew by 21%, profit before and tax after increased by 30.7 and 38.1% respectively. The bank’s customer deposit increased from N684 billion to N723 billion, 5% growth.

As a loan driven bank with loan/asset ratio of 61% (an increase from 55%), Sterlings bank demonstrated its capability to utilize customer deposits as a loan; interest income from loan and advances to customers increased by 20%, from N58 billion to N70 billion.

Based on a TTM EPS of 37k and an adjusted discount rate of 15%, we assign a fair value of N2.46, 53% upside potential from the price of N1.6.

Year to date, the stock is up by 48.1%.

Disclaimer: Please do your homework, this is not a buy or sell recommendation.

Top 7 Stocks That Could Offer Mouth Watering Returns in 2019

Best Stocks to Buy and Hold In Nigeria 2019 – Banking and Insurance Stock Recommendations In Nigeria – Best Performing Dividend IncomeStocks To Invest Your Money.

Nigeria still relies on oil as a key revenue driver but this year, the energy market has had an insignificant impact on the country’s stock market index, down year to date by 16%, despite the rising price of crude oil in the international market, now above $60 per barrel.

As we wrap up 2018 and prepare for the new year, I would like to discuss the economic indicators, and market risks that will influence equity market investment decisions and key sectors to focus on.

Where Are We Economically – Risk Perspective?

Nigeria relies on imported products for its daily personal and business needs as such exchange rate stability is very important to the sustainability of the economy.

This is the sole reason…

The CBN has shown its resolve to keep the Naira from weakening against the dollar at all cost, even if it’s going to starve the private sector of credit and burn through the country’s external reserve as a record price.

(Source: BusinessDay)

Foreign capital exit to high-yielding assets in the developed countries., at the same time, is expected to intensify on the back of a rising yield on US Treasuries as the Fed plans more rate hike in 2019 and growing political uncertainties which will impact the risk premium on Naira-denominated assets and put pressure on the exchange rate.

The Naira has already weakened from N360, the rate it exchanges to a US dollar at the beginning of the year, to N363.32 at the I & E windows. This, coupled with massive equity sell-offs in the local bourse, is a clear indication that foreign investors are already exiting the economy for greener pastures.

Here is a big opportunity for smart investors:

Since the CBN has vowed to protect the weakening Naira, it surely would have to find a way to reduce Naira sales at the I & E window by enticing these foreign investors with higher rates on fixed income securities like Treasury Bills and Bonds.

Using the recently concluded Auction on Wednesday, 31/10/2018, where Treasury Bills worth N145 billion were issued the stop rate on 91-day T-bills trended upwards to 10.975% compared to the stop rates at the previous auction, 10.96%, it is also visible that the apex bank has started its drive to make Naira asset attractive.

The rate of 182 days and 364 day T-bills rose to 13.49% and 14.4% respectively from 12.69% and 13.45%. I expect this to continue in the coming auctions.

With average bond yields at around 14%, the rise in T-bill yields is gradually taking us back the era of “FREE MONEY IN THE MONEY MARKET“, last seen in 2017 when the yield on short-term securities rose to 17% record level, above long-term rates. This will no doubt mount pressure on the government as debt servicing cost may rise to 69% by the end of the year.

When yields on T-bill starts rising and becomes attractive, funds that would have been channelled to private sector lending would be diverted to these safer government securities.

If CBN T-bills slow-down hurts bank’s profitability in the first and second half of 2018 financial year, it makes sense to say that the rising yield on T-bills issued will also drive the financial sector’s profitability in which the bank, insurance, and other asset managers are part of.

Offering a higher yield on short-term securities may not be the only resolves of the apex bank, it is also “upping” dollar interventions to save the Naira from devaluation but the former seems to be more effective but expensive.

Going Forward – Key Sectors to Watch in 2019

Banks

Bank lending, as shared on how bank wants to make more money, is already dipping on the account of weak economic activity and political uncertainties with big banks cutting their loan book while increasing their investment securities. In 2019, we expect banks to park more of deposit generated in T-bills.

  • My top 3 banks to watch are Zenith, UBA and GTB; they all offer attractive dividend yield and may appreciate in price.

Based on my 6 checklists for picking dividend income stocks, UBA and Zenith are my preferred dividend stocks.

Insurance

Insurance companies are also expected to invest more of the net premium income generated from policyholders on these fixed-income assets. I would advise you key into profitable insurance stocks with above average return on equity and a combined ratio of less than 100%.

  • My top insurance stock picks are Custodian Investment plc (dividend and share price appreciation) and NEM (share price).

Asset Managers

Investment firms that provide investment banking, asset management, securities and insurance services to corporations, governments, high net worth, institutional and retail clients are also not left out of the interest income from rising yield on T-bills in 2019.

  • My top picks for dividend income and share price appreciation are UBA Capital and Africa Prudential

While these best stocks to buy and hold in Nigeria 2019 have had their past profitability driven by rising yield on T-bills, it doesn’t in any way imply a BUY or SELL recommendation nor negate other listed equities, you are advised to do your homework.

One of my results – I shared an analysis of Cement Company of Northern Nigeria ( CCNN ) in February and why you should buy the stock. The price has increased from N16 to hit N31, 90%+, now at N22.

This Top Gaining Catering Stock Still Has 96% Upside Potential

Investors love stocks that consistently appreciate and are still trading below their fair value estimate; we call such stock cash cow as their risk of melting down is minimal while the upside potential is high.

In my company’s analysis, I will be reviewing Newrest ASL (Airservices), a stock with an upside potential that is clearly supported by its improving financials and could reward smarter investors who key into the current price of N6. Although I started accumulating the stock at N4.95, the closing price of N6.6 is grossly undervalued when compared with its estimated fair value.

Newrest ASL Nigeria Plc provides catering and related services. The Company operates inflight catering facilities, lounges, and restaurants. Newrest ASL serves the aviation industry operating in Nigeria.

See – How I Pick Penny Stocks To Trade

The stock is up by 10.92% on YTD as investors increase their bid in today’s trading after Q3 results were released.

Fundamentals.

Newrest ASL has just released an impressive Q3 2018 results with revenue coming out at N4 billion against N2.8 billion reported in 2017, representing a 42%.

On a breakdown, revenue growth was largely supported by Inflight catering services from Lagos branch, Handling and Laundry services. The company also commenced catering services to local flights and industry which contributed a significant N93million value to the top line.

Gross profit margin fell marginally to 65% (from 67%) but well above industry standard.

Operating margin, which was negative in the previous comparable period, was also impressive at N402 million while profit after tax increased by 191% to N1 billion respectively.  Interestingly, the company had surpassed its 2017 record profit of N428 million.

Return on Equity, a measure of how the firm utilized shareholders’ fund also increased to 22% against a paltry 8.5% in 2017 while exposure to debt was scaled down as debt to equity declined from 40% to 33%.

The liquidity position of Newrest ASL as indicated by current ratio increased to 3.6 from 2.7′; the company can settle its short-term obligations with its working capital.

Cash generated from operation fell from N1.7 billion to N902 million.

Technical Analysis

The stock closed at N6.6 which is above its 20-day and 50-day moving average of N5.99 and N5.57 respectively. Technically, the stock is bullish on short-term as long as the 20-day moving average is above the 50-day MA.

While the share price is above 200-day moving average of N3.38, long-term sentiments are also positive.

Valuation

Newrest ASL didn’t only reported a 293% growth in Q3 EPS, from 44k to 173k but also surpassed previous year’s EPS of 68k. Using an adjusted discount of 15% on TTM EPS of 197k, we assign a fair value of N13 to the stock which, when compared with its current closing price of N6.6, represents 96% upside potential.

From our end, we assign a BUY rating on the stock.

Why Caverton Offshore Is a Penny Stock to Watch Closely

As of this writing, Caverton had just released its Q3 2018 earnings report with key metrics indicating that the company is on track to beat its previous year record.

The stock is selling for ₦1.91 with a YTD performance of 48.06%.

Recent Result

Results for the 9-month ended September 2018 show that revenue increased from ₦14.8 billion in 2017 to ₦23,1 billion in 2018 while operating expenses also increased to ₦14.7billion (from ₦9.7billion).

The revenue was driven by 61% growth in contracts from Aeroplane and Helicopter services.

Profit before tax jumped from ₦1.8billion in 2017 to ₦2.8 billion in 2018. Profit after tax followed suit; from ₦1.1billion in 2017 to ₦1.6 billion in 2018.

Return on Equity grew from 6.9% to 10% while Debt to Equity expanded from 1.9% to 2.3%. Although interest coverage above 2 means that the company still pay its interest obligations from operating profits, the gradual accumulation of debt should be closely watched.

Cash generated from the operation on the Q3 report is ₦10.9b (compared to ₦2.3b)

Technical Analysis

Caverton, as of this writing, is trading for ₦1.91, above its 50-day average of ₦1.90, but below 20-day moving the average price of ₦1.92. Technically, the stock may have turned bullish as indicated by the moving average crosses, backed by the company’s impressive fundamentals.

The long term sentiment is clearly bearish, except the price surges past its 200-day moving average of ₦2.24

Valuation

Caverton reported a 9-month EPS of 48k, which is 33% more than the EPS of 36k in the comparable period (2017).

Using an adjusted discount rate of 15%, an assumed zero growth on TTM EPS of 89k we assign a fair value of ₦5.93 to the stock, which is 337% above the current share price.

Market update

No update on Caverton.

Recommendation

We assign a BUY rating on Caverton’s stock.

About Caverton Offshore Support

Caverton Offshore Support Group Plc operates in the marine and aviation logistics sectors of the Nigerian oil and gas industry.

How Nigerian Banks Want to Make More Money

How Do Banks Make Money in Nigeria – Analysis of Banking Stocks In Nigeria Stock Market and How They Make Money From Loan, Treasury Bills and FGN Bonds

Understanding the business of banking isn’t an option for investors looking for good banking stocks to buy but a required process that will help you uncover and weigh profit opportunities and inherent risks.

It is easier to say that banks accept deposits from individual and corporate customers and lend to borrows at a higher rate or invest in fixed income securities but knowing which of these categories accounts for 80-90 of the profits declared is critical to selecting the right bank that is positioned to make more money and pay higher dividend per share.

A bank can be loan driven if it gives most of the money generated as deposits to qualified borrowers at a higher rate while paying less as interest expenses. On the other hand, an investment-driven bank is one that is constantly increasing and investing deposits in fixed income securities like CBN Treasury bills, FGN bonds or other risk-free securities. The return on these two (2) income-opportunities is called “interest income”

As more banks deploy advanced technology infrastructures to ease transaction processes like payments, transfers, account inquiry and statements, the fees and commissions, earned on transactions performed on their platforms, are called non-interest income.

I won’t be talking about non-interest income.

How is your bank making money?

Before investing in a bank’s stock, I always take my time to understand their key revenue drivers and align with banks that are well positioned to grow their bottom line based on economic realities.

As of this writing, some banks had just released their 9-month results and it makes more sense to use their recent results to know whether they are loan or investment-driven, this will help me analyse their revenue opportunities and industry risks.

The three key metrics to focus on are the customer deposits, loan to deposits, and loan to assets ratio.

  • Customer deposit reveals the cash held on behalf of its customers, both savings, current and term deposits.
  • Loan to deposit ratio shows the proportion of the customer deposit that is advanced to customers at a higher rate.
  • Loan to asset ratio shows the proportion of the bank’s total asset that is advanced to customers.

Guaranty Trust Bank

GTB in its Q3 results reported a total asset of N3.4tr against N3.3tr in 2017. A breakdown of the total asset showed that N1.27tr was advanced to customers compared to N1.44tr in the previous comparable period, a decrease of 11%.

The bank’s loan/asset fell from 43% to 37% which shows that it is cautious in its lending to the private sector. Investment assets stood at N598 billion against nil figure in 2017.

GTB generated more cash as the deposit grew from N2tr to N2.2tr.

Loan to deposit ratio, a metric that tells us the percentage of customer’s deposit that is advanced to borrowers, fell from 72% to 57%.

While GTB is still a loan driven bank, we can easily deduce that the bank is lowering exposure to loan risk and investing more in fixed income securities.

Watch out for rising yield as inflation and economic risks increase; this might be another opportunity to key into the bank’s stock in 2019.

Zenith Bank

Zenith bank, in its Q3 results, grew its customers’ deposit to N3.2tr (from N3tr) which is 6% growth.

The total asset as of September 2018 was N5.6tr, up from N5.1 in 2017. A breakdown of the bank’s asset showed that it has reduced its exposure to loans and advanced to N1.8tr, from N2.1. Loan/asset ratio as 25% (compared to 41% in the previous quarter).

The loan to deposit also fell from 70% to 56%.

The bank, from my analysis, is also cautious of private sector lending, rather it is gradually investing more in CBN treasury bills as evident in additional N100b injected in the short-term securities.

United Bank for Africa (UBA)

The bank in its Q3 result reported a total asset of N4.5tr, up from N4 in 2017. A break down of the bank’s asset showed that loan and advances to customers fell from N1.6tr to N1.5tr while investments securities were shored up to N1.5billion against N1.2 billion.

Loan to assets ratio is at 33% against 40% in the previous comparable period.

Based on the Customers’ deposit,  which grew from N2.17tr to 3.1, loan to deposit ratio stands at 48% (compared to 59% in 2017).

Access Bank

The bank, as of this writing, reported a total asset of N4.3tr against N4.1tr in the previous comparable period. Out of this value, loan and advances stood at N1.97tr, a slight decrease from N1.99; the bank is still focused on private sector lending.

Based on data presented, loan to asset ratio fell from 48% to 45%

Deposits from customers increased from N2.2tr to N2.4, hence, loan to deposit ratio was 82% as it maintains stance on increasing interest income from loan portfolio.

Investment securities as at the reporting period were N446 billion, up from N276 billion.

In summary, Access bank is more of a loan-driven bank but gradually building up its investment securities to take advantage of the free money in the fixed income market.

From my analysis, you will notice that Tier 1 banks are lowering exposure to loan risks, and expanding their fixed income portfolio. A smart investor should pay attention to economic risks, the biggest driver of yield in the fixed income market.

When economic risks are high, investors clamour for high yield on FBN bonds and CBN treasury bills to compensate for the risk and such earn more.

As banks build their fixed income portfolio, it is a clear indication that they want to make more money from the fixed income market and less from loan and advances, since it comes with a greater risk.

This Bank’s Stock Has a 33% Upside Potential.

Wema Bank Annual Reports & Analysis of Banking Stocks – See My FInancial Result Analysis of Wema Bank and Fair Value Estimates Using Q3 2018.

NSE banking index has been worst hit by market sell-offs and we already know why: the effect of fallen yield on fixed income securities and cautious lending to the private sector, hence lower loan and advances.

Amidst these risks, Wema bank seems to be the only short-term penny stock in the banking stock I’d love to buy and resell in 2-3 months. Here is why:

The bank had just released its Q3 earnings report with key metrics showing double-digit growth.

The stock is selling for 63k with its YTD performance of 30.77%.

In January, Wema bank had an explosive run from 46k to ₦1.48, 221% growth but had since fallen to a year low.

Month to Date, the stock is up 15% which is the second month the bank stock closed higher, a sign that investors may have started accumulating the stock again.

Recent Result

Results for the 9-month ended September 2018 show that interest income from loan disbursements grew from ₦37.4 billion in 2017 to ₦38 billion in 2018 while interest expenses declined to ₦23billion (from ₦25.2billion).

Net impairment loss on financial increased to ₦477.04 (from ₦255.6), a development the bank needs to watch and manage closely.

Profit before tax jumped from ₦1.7billion in 2017 to ₦3 billion in 2018. Profit after tax followed suit; from ₦1.5billion in 2017 to ₦2.6 billion in 2018. Thanks to the well-managed operating expenses.

Wema bank generated ₦362.2b deposit compared to ₦250.9b, an increase that is tied to the bank’s growing subscribers on ALAT mobile banking app.

While tier 1 banks like GTB, UBA, and Zenith reported a lower loan and advances to customers on cautious lending, Wema bank is strategically increasing her loans to private sectors. This is evident in its recent partnership with the development bank of Nigeria.

Loan to deposit fell from 84% to 67% as the bank looks to explore the fixed income space; asset held for trading increased from ₦4.3b to ₦12.2billion.

Cash generated from the operation on the Q3 report is ₦53.3b against a negative figure reported in a similar period.

Technical Analysis

Technically, Wema bank stock’s price is below its 20-day price of 66k and 50-day moving average price of 75k which suggest bearish sentiments. As price approaches its 20-day average price, the bank’s stock may be set for some rally on the recent impressive result.

The long-term sentiment is clearly bearish, except the price surge past its 200-day moving average of 76k.

Valuation

Wema bank reported a 9-month EPS of 9.2k, which is 73.5% more than the EPS of 5.3k in the comparable period (2017).

Using an adjusted discount rate of 15%, and a projected year-end EPS of 13.2k we assign a fair value of 88k to the stock, which is 33% above the current share price.

Market update

The bank announced its partnership with development bank of Nigeria (DBN) to help small businesses access to cheaper loans of up to ₦600 million.

Recommendation

We assign a BUY rating on Wema Bank’s stock on the back of increased interest income from loan and advances and expected rise in yield on fixed income securities.

About Wema Bank

Wema Bank Plc provides commercial banking services. The Bank offers retail and corporate banking services, trade finance, treasury as well as foreign exchange operations.

How I Started Investing In Nigeria Stocks Market

How to Buy Shares in Nigeria Stock Market & Make Money Online – Learn How I Started Investing In Stocks, Pick & Trade Best Performing Penny & Dividend Shares In Nigeria Stock Exchange Market

You are welcome to my personal finance and stock market blog – a platform I created to share investing tips and how to build dividend income portfolio in the stock market.

Follow me keenly as I reveal my trading techniques and the stocks I started with. After reading this guide, you will have a clearer understanding of how the stock market works and if you had any fears about it, you would see the way forward from here. Come with me!

My Story

My name is Ogechi Ndukwe, a passionate Internet Entrepreneur, and Stock Market Investor. I started my stock market journey in 2003 when I persuaded my Dad to buy into the now-defunct Oceanic Bank shares when they offered millions of shares for public subscriptions at N5 each. Although I didn’t understand the metrics behind stock picks, from my basic knowledge of shares in Financial accounting, I knew it was a good place to invest idle cash and make money.

My dad was reluctant. I persuaded him to buy N10 000 worth of shares but he reduced it to N5000 and asked me to go subscribe at the nearest Oceanic bank in Ajao Estate, Lagos. For you to subscribe to public offers in a company at that time, you’d have to go to the nearest bank and fill a subscription form.

To cut the story short, Oceanic bank shares soared in 3 years to hit an all-time high of N32 (from N5), a level that drove our N5,000 investment to N32,000 representing more than 600% return. I sold the shares and diversified into other banking stocks and since then, I started probing the stock market, the recurring search I typed on Google was, what drives share prices higher? I knew that if I could find the right answers to that critical question, it would help me multiply my money Nigeria stock market.

The journey so far

In my quest to uncover the secret of buying shares that will rise in price, I downloaded books on stock market investing, bought hard copies of investment books. After reading through them, I discovered that these books had one thing in common, they stressed fundamentals and timing: you need to understand the company you are buying their shares in, know what drives their profits or how they make money and lastly, interpret investors sentiment; know when people are buying and when they are selling.

The last point was so important to me because, when you follow a share price, you will discover the daily and unpredictable fluctuations in price, that is the “today price is up, tomorrow price is down, next tomorrow price is down, the day after the price is up” situation. It is always unnerving for the First timer who does not know the factors that influence the prices.

The funniest part is if you had bought shares in a company you do not understand their fundamentals, you will literally have two minds; one saying ‘buy more’, another saying ‘sell now or else, you will lose your money’. When you eventually sell, you will witness the price jump to 2x the previous price. So annoying!

I experienced this in International Breweries stock. I bought shares in this company at N23 and waited for three weeks but nothing happened; there was no price increase instead the price dropped to N16.8 and out of fear of losing, I quickly unloaded all units to get my cash back. Exactly 2 weeks after I sold, the price jumped back to N23, then moved gradually to N38.9. When I checked, I was so pissed with myself and wished I had left it. In this guide, I will also talk about the greatest attitude you need to embrace like a pillow if you want to be a highly successful stock market trader.

Another share that got me in this Price trap was Okomu Oil, a local Palm oil producing and exporting company that first made me lose balance before doubling in price. I bought the stock at N15.75, and in less than 2 weeks I made 24.5%; a very modest gain. The big fall came when investors quickly sold their shares to take profit and it fell to N12.32. I couldn’t hold that loss, I sold the shares and right under my nose, Okomu Oil doubled to N32 in 3-4 months. You can imagine the profit I would have made if I knew what I now know perfectly that makes me buy shares at the right time.  However, Okomu Oil is also part of my portfolio right now.

I can go on and on to share my failure in the stock market. The truth is I didn’t have a solid understanding of shares. I did guessworks, ended up buying shares of a good company but eventually sell off too soon, with no knowledge that the share is about to rise again. I was not patient enough to hold on to my investment for at least 6 months before deciding to let go. Patience is the greatest attitude you should have as a Stock Market Investor.

After reading several books on Stock Marketing Investing, How Successful Investors buy shares plus my years (of experience) following the market in good and bad times. I discovered the secret to multiplying my money in the stock market. This is a sure way of earning passive income.

As I write this report, I have invested in several companies after due diligence and analysis and if you thinking of getting started in the stock market, follow these steps:

  • Consult a registered stockbroker; My recommended brokers are Meristem, MorganCapital or Stanbic IBTC broker. Personally, I have had a great experience with Meristem stockbroker; swift support and client services.
    • Your preferred broker will ask you to submit the following documents: a valid ID (International Passport, National ID or Driver’s License), Utility Bill for address verification, and Passport Photograph
    • Upon approval, a CSCS account will be processed and your unique clearinghouse number (CHN) will be sent to you.
    • Fund your account and start trading shares.
  • Invest in knowledge, buy books and click here to join our stock market group on WhatsApp.
  • Exercise patient and avoid get rich stock market scheme.

Key Principles for Investing in the Nigerian Stock Market – How To Know The Best Nigerian Stocks To Buy Now

They include; Proper timing, Proper Financial Report Analysis, and Patience. These three secrets combined can make anyone, I mean anyone earns a consistent profit in the Stock Market.

See – My top stock market strategies and advise

Let’s read how each of them works.

Financial Report Analysis

This is the most important place to look at before you can decide on a stock – everything about stocks starts and ends in the way a company has performed during the year or on a quarterly basis. Always analyze the sales trend, cost drivers, profit potential, debt level and cash position of a company before buying shares in your selected company. Investors are only attracted to good business generating healthy cash flow and so should You.

When a company reports an impressive profit figure that surpasses the previous year’s record, investors are attracted to such company and as they buy more shares, price increase follows.

Some folks have asked me if one needs to be an Accounting graduate or Financial Analyst to interpret the financial statement. The answer is NO, you only need to employ common sense – Think like a business owner and you will pick the basic data you need and move on.

A great company is expected to grow their sales (operating income – income earned from their core business operation). A company that reports a good number of products outside of their core business is not recommended as such sales are not sustainable – always watch out for the sales number. 

See – How to know which sector stocks to invest in right now

Many Companies release reports of their activities. The most important report to follow when investing in a company’s share is their quarterly report. It reveals a whole lot about the current’s year financial result; an indication that tells whether you should hold on to the stock or sell immediately to cut your loss.

Proper Timing

Every company, even with good financials, has a specific period investors scramble to buy their shares. You need to know the perfect time to buy a company’s share and hold on it without factoring the daily fluctuation of price. There is a war between buyers and sellers, prices don’t go up in a straight line neither does it fall in the same manner. But, as an intelligent trader or investor, you should focus on value (which you can spot from the first principle) and not price because eventually, the future price of a stock will reflect the perceived value of the company. So learn to spot the perfect time to buy stock.

See – Dividend Income Stocks

Don’t make the mistake of buying stock when you are not sure of its time – You may end up buying when the price is about to fall sharply and hence wipe out a percentage of your portfolio value.

See – When is the best time to sell your shares?

The essence of timing is to apply what I call Price Level Analysis, a powerful technical skill that helps you analyze investors’ sentiments. With it, you will definitely know when a share is trending up, down or sideways. In this blog, I will be sharing a practical guide to pick profitable stocks at the right time.

See – How To Know Where Big Stock Investors Are Putting Their Money

Patience

We are still on the 3 key principles to making money in the Nigeria stock market. The third but not the least important principle here is patience. People lack patience when it comes to building a business or waiting for their investment return; the notion of quick money has taken over. A lot of people want to make fast cash – bring N10 000 and take N100 000 after 30 days. What a financial trap!

The easiest way to lose money is to put it in an investment with no solid revenue model – not understanding the principles behind the return but only focusing on the return.

When I talk about the stock market, usually the next thing I hear is ‘How much will I make after 30 days?’, as if I control prices. There is no investment without risk and as such proper education is the key. I don’t advice people to buy shares when they have zero knowledge of the market.

To exercise patience, you need to learn the basics of the stock market, understand the key drivers of shares price, and how to pick great stocks.

You also need to learn how to wait. The biggest reason I missed opportunities in my early years of trading stocks was lack of patience, I hardly waited for weeks to see the result of my investment. I just sold as soon as possible once it falls, after which price would spike.

But now, when I buy, I have a minimum holding period that I have mastered – this period is so vital that it allows the value of the stock eventually moves price to the north or south.

As an investor, you must be ready to exercise patience, allow your investment to grow in the midst of daily price fluctuations or else, fear will make you lose the profit potentials of your perfect trade.

But that doesn’t mean patience is the ultimate key, the two factors mentioned earlier must be in place and it is more profitable when you follow the sequence which is:

I hope you enjoyed my personal trading guide and have learned a lot about what it takes to be successful in the Nigeria stock market? If you have any question(s) or would like me to discuss your personal investment objectives, click here to join our stock market group on WhatsApp

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Surely, you are interested in gaining more fresh insights on how to buy shares in the Nigeria stock market. I have made some errors that caused me lots of money and I believe you don’t need to lose same to gain the right investing knowledge, here are some key advises and tips to buy shares in the stock market.

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.

Dividend Yield

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%.

Dividend Payout

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.

My 6 Checklists for Picking Great Dividend Income Stocks

Best Dividend Paying Stocks To Buy In Nigeria Stock Market – Learn How To Buy Shares In Companies That Pay High Dividend Yield Every Year.

A lot of investors overlook the power of dividend. In fact, since 1990, dividend has generated half of the stock market investing profits in the stock market. Further, dividend stocks offer investors consistent income and are often a hedge against share price fall.

Benchmark

Not every company that pays dividend actually qualifies as a good dividend income stock, so it’s better for an investor to know when he is better off investing in “Treasury Bills, FGN Bonds,” or keeping their cash in “Fixed Deposit”

As of this writing, CBN Treasury bills pay between 11-12% per annum while 5-10 year FGB bonds hover around 15%.

With such juicy and risk-free return on your investment payable semi-annually, why then should one consider a dividend stock?

The reason isn’t unconnected to the fact that returns from Treasury bills and FGB bonds are subject to interest rate risk, and as inflation inches upward, your return doesn’t increase; it is fixed throughout the tenor and might even reduce in value as real return turns negative. Negative real return arises when the inflation rate increases faster than your return on investment.

This is the reason, smarter investors don’t buy a stock because it pays dividend consistently but that the return as measured by dividend yield is close to the average yield on Treasury or FGB Bonds and likely double in 5 years or less. A dividend yield is calculated by dividing the dividend per share by share price. It is a measure of the percentage of cash paid to shareholders based on the amount invested.

Let’s take UBA as a perfect example of how dividend income stock can generate an above-average return on your investment if you had bought the stock for N4 in 2014 when it paid 10k per share.

The yield as of then was 2.5% while 10-year FGN bond in the period was 11.89% to 12.09%. (Source: Proshare)

FGN bond as that period paid more and seems attractive compared to UBA stock.

But now, equity investors in UBA now enjoy a better return of 21.25% today and sells for N8 per share (85k per share dividend divided by N4 paid on purchase in 2014), an impressive long-term return that beats the same FGB bond of 12%.

The big question, how can one scoop up dividend stocks that also have an upside potential? Yes! I mentioned share appreciation because, a company that rewards its shareholders year on year will, no doubt, attract more investors who place a premium on the value and as such, see its share price increases on accumulation.

Here are my 6 checklists to spot great dividend stock in the NSE market.

Dividend Yield

The dividend yield lets you measure the return expected when you buy at the current market price. It’s best benchmarked with CBN Treasury and FGB Bonds and should not be far less or more.

As of this writing, the FGN bond is 12%, so a modest dividend yield of 8-10% makes more sense. A dividend yield above 15% calls for further scrutiny as such tempting level could be a result of a massive sell-off since lower prices translate to higher yield, an investor should stick to a moderate yield of 8-10%.

Consistency of Dividend Payment.

Your preferred stock should be a dividend aristocrat; a stock that had been paying dividend consistently for 7-10 years. Dividend aristocrat is known for their consistency in dividend payment and such tends to be a safe haven for investors looking for retirement stocks.

Annual Dividend Per Share Growth of 10%.

This is a key metric to watch as it is the reason UBA stock yield, as shared earlier, jumped from 2.5% to 21.25% in 4-5 years. Based on the dividend history of the bank, it has an average annual growth of 15%. Using rule 72, a stock should have an average dividend growth rate of 14% to double its payout to shareholders in 5 years. For 20% growth rate, it will take 3-4 years.

When you have several dividend income stocks with high and low yields to choose from, use their average annual dividend per share growth to screen for the best. High yield doesn’t mean it is a great pick; you might end up having your cash payout reduced if it’s been stable or stagnant but a lower yield with above-average growth will reward you more in the future.

Dividend Payout.

The average payout shouldn’t be in excess to deter the company from re-investment. Smart investors know that growth comes from re-invested profit and as such should feel uncomfortable buying equities in a company that pays a higher portion of its profit back to shareholders except it’s a special dividend from income realized from one-off asset sale. The rule of thumb is to buy stock with dividend payout less than 40% of its earnings per share.

Return on Equity vs Debt to Equity.

A great dividend stock utilizes shareholders fund to generate more profit above industry average while reducing its interest expenses or lower exposure to high-interest debt. A higher cost of debt could affect profit after tax hence, reduce distributable and re-investible profits. The average return on equity of a good dividend stock in the last 7-10 years should be above 10% while debt to equity should be reducing or less than 1.

But, for businesses that generate deposit liabilities like Banks, focus on the cost of risks, capital adequacy ratio and Non-performing loan ratio.

On insurance stocks, focus on average claim ratio, expense ratio and combined ratio as a way to measure profitability.

Average Free Cash Flow Growth.

Dividend is paid from cash generated from operations, not from net profit. As a smart investor, you should focus on the free cash flow reported on the cash flow statement. To know what the free cash flow is, deduct capital expenditure from cash flow generated from operating activities.

Companies can manipulate their net earnings at the end of the year but cannot doctor their cash flow. Great dividend income stocks don’t just grow their net earnings but also generate enough cash to pay shareholders at the end of the year.

Based on these checklists, I will be sharing recommended dividend income stocks you can buy on this blog, do subscribe to get the latest updates or click here to join our WhatsApp Group on Stock Market

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