Dangote Cement’s model for shareholder return is unusual yet simple

Investors in the financial world often classify stocks into two main categories: growth stocks and income stocks. These categories help investors make informed decisions based on their financial objectives. Growth stocks are those primarily sought after for their potential to deliver substantial capital gains over time, with investors focusing on the anticipation of future earnings growth.

Conversely, income stocks are valued for the consistent cash dividends they provide to their shareholders. The choice between these two stock types often involves a tradeoff between short-term income and long-term growth potential.

However, when it comes to Dangote Cement, a prominent player in the Nigerian and Sub-Saharan African markets, it seems that investors may not need to make such a tradeoff. Dangote Cement has developed a unique approach to reward its shareholders, offering them the best of both worlds – capital gains and generous dividends.

Dangote Cement, Sub-Saharan Africa’s largest cement producer, boasts an impressive installed capacity of 51.6 million metric tons across ten African countries. In its home country of Nigeria, it dominates the market with a commanding 64% market share. The company has been listed on the Nigerian Exchange Group (NGX) since October 26, 2010, and today, it ranks as the third most valuable stock on the NGX, with a market capitalization of N4.91 trillion, trailing only Airtel Africa (N5.82 trillion) and MTN Nigeria (N5.05 trillion).

Since its initial listing on the NGX, Dangote Cement has consistently delivered value to its shareholders through a well-balanced combination of capital gains and dividends. In its recently published annual report for the fiscal year 2022, the company’s dividend payouts have shown an impressive compound annual growth rate (CAGR) of 33%, a remarkable feat for a listed company in Nigeria.

Over the past decade, Dangote Cement’s dividend payments have remained stable and have experienced consistent growth. In its most recent corporate action notification, the company proposed a final dividend of N20 for the 2022 fiscal year, with payments scheduled for April 14, 2023. Coupled with a qualification date of March 30, 2023, this arrangement offers shareholders an attractive dividend yield of 6.94%.

Notably, the company’s share price performance has not lagged behind. In 2022, the share price rose by 3.85%, and in the current year, it has already surged by 7.91% year-to-date (YtD), surpassing its five-year moving average price. Since the onset of the COVID-19 pandemic in 2020, which saw the share price plummet to a multiyear low of N126 per share, Dangote Cement’s stock has made an impressive recovery, now trading at N288 per share, marking a remarkable 128% gain.

A broader perspective reveals the consistent uptrend in the company’s share price over the past five years. In the last six months, spanning from October to March, the share price recorded a staggering 77% increase. This strong share price performance complements the company’s dividend growth, showcasing a harmonious relationship between earnings and stock price appreciation.

In terms of fundamental performance, Dangote Cement’s revenue and earnings before interest, taxes, depreciation, and amortization (EBITDA) have exhibited a robust CAGR of 18% and 15%, respectively, over the past 12 years. This signifies a fivefold increase in revenue and underscores the company’s growth story. Earnings per share (EPS) have also recorded a double-digit CAGR over this period. When combined with the company’s share buyback program, this strong EPS growth is likely to drive further increases in the share price.

Dangote Cement’s proactive approach to share buybacks has been a significant contributor to enhancing shareholder value. Share buybacks involve the company purchasing its own shares, thereby reducing the number of outstanding shares. The result is a higher dividend payout per share, as the total profits are distributed among fewer shareholders. This strategy reflects Dangote Cement’s commitment to finding additional avenues, apart from traditional dividends, to return cash to shareholders.

In December 2022, the company’s shareholders authorized a new share buyback program, allowing for the repurchase of up to 10% of its issued shares. Prior to this, between December 30, 2020, and January 20, 2022, the company had already bought back 0.98% of its issued and fully-paid ordinary shares. To provide context, in December 2020, the company executed a buyback of 40,200,000 units of its shares at a total cost of ₦9.8 billion, encompassing the par value of the shares and an additional premium. Another buyback initiative took place in January 2022 when the company repurchased 126,748,153 units of its shares at a total cost of ₦35.3 billion. As of December 31, 2022, the company held 166,948,153 shares, equivalent to ₦45.2 billion. This strategy has the potential to deliver a double win for shareholders: appreciation in the share price and augmented dividend payments.

The combination of share buybacks, consistent dividend distributions, and capital appreciation may seem straightforward and expected for listed companies. However, in Nigeria’s challenging stock market landscape, such a multifaceted approach to shareholder value is uncommon. In Nigeria, many companies do not pay dividends, let alone engage in share buybacks. Dangote Cement’s distinctive strategy is a testament to its commitment to shareholders and its intention to provide exceptional returns on investment.

Nonetheless, Dangote Cement, like all companies operating within a complex economic environment, is not immune to negative headwinds. The persistent macroeconomic challenges in the country continue to affect businesses, including Dangote Cement. These headwinds have the potential to constrain the company’s growth.

In 2022, Dangote Cement reported a group revenue increase of 17.0% to N1,618.3 billion, attributed to improved price realization that offset rising costs. However, sales volumes declined across all market segments, resulting in a cumulative drop of 5.1%. The company achieved an earnings before interest, taxes, depreciation, and amortization (EBITDA) of N708.238 billion in 2022, compared to N684.595 billion in 2021. Nevertheless, the EBITDA margin declined to 43.8%, down from 49.5% in 2021 due to cost pressures. These pressures included significant fluctuations in foreign exchange rates and a decrease in the availability of gas in Nigeria.

Consequently, the company’s profit before tax decreased to N524.002 billion in 2022, marking a 2.61% decline from the previous year’s N538.366 billion. Despite this decline, the company’s full-year 2022 earnings per share (EPS) still managed to grow by 4.8%, aligning with analyst expectations. This growth outpaced the share price increase and exceeded Nigeria’s GDP growth rate of 3.1%.

One positive note is that Dangote Cement has taken measures to address some of these cost pressures. The company’s investment in alternative fuel feed systems at its Obajana and Ibese plants, aimed at reducing energy costs, is a promising step in the right direction. These actions reflect the company’s commitment to maintaining its competitiveness in a challenging economic environment.

In conclusion, Dang