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Why You Should Be a Longterm Investor In Zenith Bank

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Why You Should Be a Longterm Investor In Zenith Bank by : 4:48 am On September 30, 2018

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If you are looking for a banking stock to speculate on right now, Zenith bank isn’t one you should gamble on, rather key into the potential of the bank as a long-term investor.

As of this writing, Zenith Bank’s stock year to date return is -16.9% but the dividend yield of 12.3% is a return every smart stock market investor should quickly take advantage of right now.

The stock and UBA, are the only banking stocks with a double-digit yield above 10%.

While dividend yield only isn’t enough to ascertain the stability of a long-term dividend income stock, let’s look at the dividend history of Zenith bank.

Zenith, at a closing price of ₦21.5 and projected final dividend of ₦3, offers attractive dividend yield (13.9%) that clearly beats fixed deposit, treasury bills and long-term bonds.

Based on the dividend history of Zenith, ₦1.75 in 2014, ₦1.8 in 2015, ₦2.02 in 2016, ₦2.7 in 2017 and an interim cash pay out of ₦0.3k in 2018, it has an average annual dividend per share growth of 15%. In 5 years, shareholders of the bank may see their pay out jump from 13.9% to 27.9% (expected pay out of ₦6 in 2023 per share divided by the purchase price of ₦21.5)

In the last one month, the bank’s stock is up by 2.35% as investors looking for long-term stocks with attractive yield accumulates above average units of bank shares at an undervalued price.

Recent Result

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Results for the half year ended June 2018 show that interest income fell by 12.8%, from ₦262 billion in 2017 to ₦228 billion in 2018 while interest expenses fell to ₦74billion (from ₦123billion) as the bank lowered its interest rate on fixed deposit to save cost. Overall, the bank’s customer deposit from ₦3.4 trillion to ₦3.1 trillion.

Profit before tax jumped from ₦92 billion in 2017 to ₦107.3 billion in 2018. Profit after tax rose marginally; from ₦75.3billion in 2017 to ₦81.7 billion in 2018.

The bank’s financial performance was largely boosted by the significant drop in impairment loss on financial assets to ₦9.7 billion (from ₦42.3 billion in previous comparable period). Thanks to the increasing oil price (above $65/barrerl) which is expected to lower oil and gas loan risk and boost asset quality.

The growing adoption of mobile banking is also expected to support non-interest income in the future.

Technical Analysis

Technically, Zenith bank stock price is below its 20-day price of ₦23 and 50-day moving average price of ₦26.3 which suggest that investors had been selling the stock due to general market sentiments.  But, as the stock found support at the same level with the stock’s 200-day-moving-average of ₦19.33, and as of this writing sells for ₦21.5, we believe long-term investors are now taking advantage of the attractive dividend yield opportunity since it’s a dividend income stock.

Valuation

Zenith bank reported a 2018 half year EPS of ₦2.60, which is 8% growth over the EPS of ₦2.4k in the comparable period (2017).

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Using a discount rate of 14%, a modest declined full-year EPS (on the expected reduction in interest income due to lower yields on fixed income securities) of ₦5.2, we assign a fair value of ₦37 to the stock, which is 72% above the current share price.

Market update

S&P Global Ratings affirmed its ‘B’ long-term and ‘B’ short-term issuer credit ratings on Nigeria-based Zenith Bank PLC (Zenith). The outlook is stable. At the same time, the rating agency affirmed its national scale ratings on the bank at ‘ngA/ngA-1’.

The affirmation reflects the view that Zenith will continue to display better asset quality indicators than its domestic peers and sound revenue generation over the next 12-18 months despite the generally slow economic recovery in Nigeria. (source: Proshareng)

Recommendation

We assign a BUY rating on Zenith bank for long-term investors.

About Zenith Bank Plc

Zenith Bank PLC is a commercial bank with offices located in several parts of Nigeria. The Bank provides services to corporate, commercial and individual customers.

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