Aggressive Dividend Policy Exposes Dangote Cement to Liquidity Risk—Moody’s

Dangote Cement stocks
Image Credit: Bloomberg

By Dipo Olowookere

One of Africa’s leading cement makers, Dangote Cement Plc, could find itself in a liquidity crisis, a renowned credit rating agency, Moody’s Investors Service, has warned.

This warning was contained in a statement issued by the global firm on Thursday on the completion of a periodic review of the ratings of Dangote Cement Plc.

Dangote Cement is a company owned by a Nigerian, Mr Aliko Dangote, who is believed to be the richest man in Africa. He is the chairman of the company.

In the statement issued by Moody’s today, it was stressed that the aggressive dividend policy of the cement manufacturer could backfire.

For the 2019 financial year, Dangote Cement paid its shareholders a dividend of N16 per unit and a year earlier, the company paid the same amount.

Dangote Cement’s shares are traded on the Nigerian Stock Exchange (NSE) and Business Post gathered that at the close of trading today, the company’s equities were flat at N134.70 per unit.

“Dangote Cement’s high reliance on short term debt funding and aggressive dividend policy exposes the company to liquidity risk,” Moody’s said in the statement on Thursday.

However, it pointed out that the cement firm’s B1 corporate family rating (CFR) is supported by its strong market presence in Nigeria and other African markets in which it operates.

According to the rating agency, Dangote Cement’s “strong business profile benefits from its dominant market position in Nigeria and high gross margins of above 60 per cent.”

“Credit metrics remain conservative with low debt /EBITDA of around 1.0x and high-interest coverage above 5.0x, supported by prudent financial policies that ensure credit metrics remain strong through operating and project build cycles,” it added.

It stated further that the B1 rating, which is one notch above Nigeria’s B2 bond rating, considers the serviceability of local currency debt obligations and company’s strong intrinsic credit quality balanced against meaningful linkage and limited ability to withstand stress at the Nigerian sovereign or macroeconomic level.

But Moody’s emphasised in the statement that the periodic review on Dangote Cement “did not involve a rating committee.”

A look at the dividend history of Dangote Cement by Business Post in the last 10 years showed that in 2010, the company paid N4.25 (N2 interim and N2.25 final). In 2011, it paid N1.25 interim and one for 10 bonus share.

From 2012, it adopted the payment of dividend once a year and in that year, it paid N3 and then increased it to N7 in 2013 and slashed it to N6 in 2014 and then up to N8 in 2015, N8.50 in 2016, N10.50 in 2017, N16 in 2018 and N16 in 2019.

In the first six months of 2020, Dangote Cement recorded a profit after tax of N126.1 billion compared with the N119.2 billion achieved in the first six months of 2019.

Earlier this year, Dangote Cement issued N100 billion bond to investors and the sale was oversubscribed. The papers were sold under the N300 billion bond programme the company.

Dipo Olowookere is a journalist based in Nigeria that has passion for reporting business news stories. At his leisure time, he watches football and supports 3SC of Ibadan. Mr Olowookere can be reached via dipo.olowookere@businesspost.ng

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