Oge
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
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).
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.
