BATU: A cash cow or a pig waiting to be slaughtered?

It’s any investor’s dream to buy into a stock that will maximize his wealth. This is made possible by the dividends paid out by the company overtime and obviously the appreciation of its stock price. The dividends paid out depend entirely with the company’s dividend policy. As such, the company’s management determines on its own volition whether shareholders deserve a payout or not. On the other hand, the company’s quoted price on the stock market is normally dependent on a whole lot of factors one of them being the dividends paid out year on year. We could therefore argue that a company’s management can possibly massage a depressed stock by manipulating the dividends payout to possibly attract the ‘greedy’ investors on board who will in the end cause an upsurge of the price. Well, the only way to determine that there is no manipulation behind the curtains is to simply do a review of the books. The question is, ‘Is the payout fair vis-à-vis what the company can actually afford?’ 

BATU’s (British American Tobacco Uganda) shareholders took home a remarkable dividend payout amounting to Shs. 228 (Us$0.09) per share held for the financial year 2010, which effectively translates to 100% dividends paid out of profits. Superficially, it is such a generous token to shareholders. Fundamentally, even the smallest business owner is careful not to reward himself out of profits extravagantly as the business is bound to require capital input in future for expansion purposes. These retained earnings of a business are obviously the best means of expansion as they do not attract interest payments. BATU’s retained earnings in the financial year 2009 stood at a worrying Nil, however in 2010 the figure was reported to be a meager Shs.170 million. We could presume that BATU is not in dire need of expansion in future given the fact that it’s no longer internally manufacturing the leaf and has instead turned to exporting it. The move has since then turned out to be ingenious with a weakening shilling against the major currencies. It also meant that BATU had to sell off its surplus assets that were rendered idle after the decision. On this basis, we could probably okay the extravagant dividend payout.

On the flip side however are some quite disturbing facts. BATU reported a negative Shs. 38 billion as the cash flows for the financial year 2010, partly attributed to a Shs. 7.8 billion generous payout to shareholders. Attributing to the cash flow downside is also the reliance on bank borrowing and overdrafts to the tune of Shs. 40 to 50 billion year on year. It’s no rocket science to figure out that BATU is indeed incurring hefty interest charges and worst of all during a period when we are experiencing an upsurge in interest rates. Does such a disappointing performance guarantee the handsome dividend payout? Your guess should be as good as mine.

Well, history has it that tobacco and beer companies are always generous to their shareholders. Actually their pompous annual general meetings (AGM) tell it all. Most investors therefore have a natural liking for these stocks definitely due to the maximized return availed by them. However, in the event of a downside in performance these companies are bound to come hurtling like a rock down a cliff due to the weak fundamentals in place. In my view actually, BATU is not a cash cow but a pig waiting to be slaughtered.