Total Nigeria Plc ended 2015 fiscal year with a 14% shortfall in total Revenue and a 24% decrease in profit after tax. The company had recorded profit after tax of N5.29 billion in 2014 only to record N4.05 billion in 2015. The reason for this seemingly poor performance may not be far fetched given the crash in oil prices in 2015 which left the Energy sector scrambling for cover. However, in what must have delighted its shareholders, the board of Total Nigeria Plc proposed a final dividend of N12 per share which when added to the interim dividend of N2 already paid, brings the final dividend for 2015 to N14. As may be seen from the financial highlights below, the company’s earnings per share for 2015 is N11.92, so with a dividend of N14, the company’s payout ratio for 2015 is 118%. In addition to a more than 100% payout ratio, the company also recorded a dividend growth rate of 27% having paid a total of N11 in 2014 compared to the current year’s N14
All over the world, it isn’t uncommon for companies, especially in commodity related sectors like Energy or Materials, to have payout ratios in excess of 100% from time to time. There is no hard and fast rule about what the typical dividend payout ratio should be. It is, however, important that investors understand the concept of dividend payout ratio as it offers a clue on the sustainability and growth potentials of dividends from a company.
Payout ratios vary depending on the industry and the company’s stage of growth. Young or fast-growing companies tend to pay out little or no dividends because of the need to reinvest the cash in the business. Also, cyclical companies with volatile earnings also tend to have very low payout ratios, because they need to keep the cash as a cushion for bad economic times. On the other hand, matured companies with predictable earnings and strong cash flows tend to pay out a higher percentage of their profits as dividends. Yet there are some companies that prefer to set and maintain a target range for their payout ratios with the aim of striking a healthy balance between returning income to shareholders and retaining income for re-investment in new growth opportunities.
When a company engages in a payout ratio that exceeds 100%, such company can dip into its cash resources or borrow to sustain the dividend. It does look like Total Nigeria Plc is comfortable with its 118% 2015 payout ratio as it has about N16 billion in retained earnings and N13 billion in cash balances although it is questionable what the N13 billion in cash is for when the company has almost the same amount in borrowings. Unless the interest being generated by the cash and bank balances are much more than the interest expense on the borrowings, one may hasten to question the rational for keeping so much cash in the light of the borrowings and of paying out so much in dividends. Click to see detaild Financial Report