Investors have undervalued financial sector stocks at the Nairobi Securities Exchange (NSE) despite double-digit growth in profits and dividend payouts, an analysis of
price ratios used to gauge stock valuations shows.The analysis of the price-to-book and price-to-earnings ratios–which measure the value that market participants attach to a company’s shares relative to its net assets and earnings— for the 17 listed bank and insurance firms shows that only three have a P/B ratio of more than one, effectively rendering them undervalued by this metric.
The average P/E ratio for the 11 listed banks stands at 3.3 times, and that of the six insurers at 5.17 times, which are lower than an average of 7.33 times for the stock market.
The ratios are used by investors to gauge whether stocks are overvalued or undervalued in the stock market, whereby the lower the ratio the more a stock is undervalued.
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“If you are looking for the undervalued prospects, you look for the companies that are recording ratios that are lower than the industry or market median,” said Genghis Capital analyst Ronnie Chokaa.
Other large blue chip counters have a higher P/B ratio compared to banks, suggesting that their stocks are overvalued by investors.
Safaricom (3.74 times net assets), EABL (4.3 times) and BAT (2.6 times) have share price valuations more than two times their book value, while their P/E ratios are also higher at 11.3, 10.1 and 6.2 times respectively.
In the 2022 financial year, the banking sector made a record Sh244 billion in pre-tax profits, data from the Central Bank of Kenya (CBK) shows, raising their dividends in the process. Four of the six insurers also recorded a jump in profits last year, reflecting improved returns from the underwriting business and reduced costs.
Analysis of individual listed banks shows that nine of the 11 raised their dividend payouts for 2022, with only KCB cutting theirs and HF Group not paying a dividend in the period. Three insurers—CIC, Jubilee Holdings and Kenya Re paid a dividend last year.
The latest dividend yields (trailing) for the financial sector stocks show a majority in double figures, pointing to the effect of a mixed performance of share prices compared to rising payouts per share.
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Out of the 11 listed lenders, five have witnessed their share prices appreciate in the last three months, four have recorded a depreciation and two have remained unchanged.
For the banks, the highest dividend yields are on Standard Chartered Kenya (13.6 percent), I&M Group (13.3 percent) and Co-operative Bank at 12.2 percent, all of which beat the pre-tax return of 11.9 percent offered by the government’s one-year Treasury bill.
Among the insurers, Kenya Re’s dividend yield of 11.2 percent leads the segment, followed by 7.2 percent from CIC and Jubilee’s 6.5 percent.
In a market, which has been in a bearish run for years, there would ideally be a rush for stocks offering stable dividend payouts. Such demand drives share price rallies, but in the case of the financial stocks, this has not happened, bar some spikes ahead of book closures for the cash distributions.
The financial sector-heavy NSE 25 Index has in the year-to-date shed 13.4 percent to stand at 2,717 points by the close of trading on Friday, while the blue chip-led benchmark NSE 20 Share Index has dropped by a much lower margin of 5.6 percent in the period, to 1,582 points.
→ cmwaniki@ke.nationmedia.com
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