Shareholders in Dangote Cement have consistently benefited from robust dividends, with cumulative payouts reaching N2.8 trillion by 2024.
In 2023, the company raised its dividend by 50% to N30 per share, yielding 6.27% at the current share price of N478.80.
This boost contributed to a total return of 56% year-to-date, driven by both dividend income and share price appreciation.
While the company’s dividend history is a clear draw, the question remains: does Dangote Cement’s valuation at N478 per share offer real value considering its recent performance and cost pressures?
The first nine months of 2024 reveal a more challenging landscape for Dangote Cement as it grapples with rising operational costs and profit margin compression.
Although revenue grew by 69% year-on-year to N2.56 trillion, driven by resilient Nigerian demand and strategic price increases, these gains are dampened by escalating costs in fuel, power, interest expenses and foreign exchange loss, which have significantly squeezed profit margins.
Revenue rose by an impressive 69% year-on-year to N2.56 trillion, driven by strong demand in Nigeria and pricing adjustments. Still, this revenue growth hasn’t translated to a comparable rise in profits due to mounting costs across key operational areas.
Operational costs have surged, putting significant pressure on margins. Fuel and power costs, which now constitute 44% of the cost of sales, increased by 109% year-on-year.
Additionally, haulage expenses grew by 99% to N405.8 billion, eating up approximately 31% of the gross profit. Together, these surges have eroded profit margins despite strong top-line growth.
Rising interest costs, up 152% to N227.7 billion, have halved the interest coverage ratio to 3.3x from last year’s 6.6x. These spikes are squeezing profitability, as operating profit edged up just 0.37%.
Foreign exchange losses are also weighing heavily on the company. FX losses climbed by 124% year-on-year to N222.1 billion, representing nearly 30% of operating profit. The company’s reliance on foreign inputs and equipment means that FX volatility is a critical factor, and continued naira depreciation could exacerbate these losses further.
Dangote Cement’s low-capacity utilization is another area of concern. While production capacity has grown slightly to 52 million tons, actual production volume increased by only 1.7%, indicating a utilization rate of less than 40%. This low rate hints at an underutilization of resources, which could limit future revenue growth if not addressed.
Recognizing these operational challenges, Dangote Cement’s CEO Arvind Pathak has outlined cost-cutting and sustainability initiatives aimed at mitigating some of these pressures. The company recently introduced a fleet of 1,500 compressed natural gas (CNG) trucks, aiming to reduce dependence on high-emission diesel vehicles.
Additionally, the company has launched 11 of 17 planned alternative fuel projects to diversify energy sources and reduce fuel expenses. These initiatives align with Dangote Cement’s sustainability goals and should support cost efficiencies over time.
However, these projects are long-term in nature, and their full financial impact may take time to materialize.
Investor sentiment has been tempered, as evidenced by a notable decline in Dangote Cement’s market capitalization from a peak of N11.4 trillion in the first half of 2024 to N8.2 trillion as of November 14, 2024.
For existing shareholders, holding onto the stock seems a prudent option, given the company’s ability to maintain profitability and its consistent dividend history despite current cost pressures.
While the challenges are notable, Dangote Cement’s resilience and strong market position suggest that these headwinds may be temporary.
For prospective investors, however, it may be wise to wait for clearer indications of successful cost control measures and stabilization of foreign exchange risks before entering, as this would provide a more secure foundation for long-term growth.