CCSfs Dividend Research - Perking Up Your Dividend Returns1

2nd Floor, Ojijo Plaza
P.O. Box 49243, 00100

Nairobi, Kenya
Tel: 254 20 3750068 / 3742404
research@creativecapital.co.ke
Perking Up Your Dividend Returns 19th January 2009
CONTACTS Table of contents
Investment Advisory Introduction to Dividend Research…………………………………….…….1

Waceke Nduati – Omanga
Introduction to the NSE……………………………………………………….3
waceke@ccsfinancialsolutions.com
Introduction to Dividends…………………………………………………….4
Portfolio Management
Regina Gachengo
regina@ccsfinancialsolutions.com THEME I: MAXIMIZING RETURNS
, Graphical Representation…………………………………………………5
Salim Mzee
salim@ccsfinancialsolutions.com , High Dividend Yield, High Returns……………………………………..6
Research and Analysis

Alexander Muiruri THEME II: REINVESTMENT OF DIVIDENDS
alex@ccsfinancialsolutions.com , Long Term Returns and Inflation………………………………………...7
, Simple Reinvestment Strategies…………………………………………10
OUR SERVICES: THEME II: EQUITY INCOME FUNDS
CCS Financial Solutions Ltd , Modeling a Portfolio ……………………………………………………..13

, Conclusions………………………………………………………………..16
Investment Advisory
Financial Planning APPENDIX

, NSE 20 Index, Tier Composition & Corporate Actions………………..17
Stock Broking Services
, NSE 20 and AIG 27 Index Composition………………………………...18
Private Placement Finds , Paycheck Stock Profile – East African Breweries………………………19
Unit Trusts and Offshore Funds , Paycheck Stock Profile – Bamburi Cement……………………………..20
, Paycheck Stock Profile – Standard Chartered Bank ..…………………21
Portfolio Management
, Paycheck Stock Profile – British American Tobacco…………………...22
Research and Analysis , Paycheck Stock Profile – Nation Media Group...………………………23
, Paycheck Stock Profile – Total Kenya…………...………………………24
, References.…………………………………………...…………………….25
Introduction to CCSfs Dividend Research
CCSfs introduced you to its dividend theme in early August 2008 at a time when the market had corrected itself
and signs of an impending negative (bearish) sentiment had begun to emerge. The idea was to design an
experiment that would investigate whether a portfolio that targeted income oriented dividends could survive the
high volatility and provide an adequate return given the inflation data available at the time. The experiment was
conducted due to the fact that not many studies were available concerning a slump in the Kenyan stock market in
reference to strategies that could be adopted (and if they did exist they weren’t widely available to the public1).
Although to a large extent this study was influenced by a previous research paper published by Tweedy, Browne
Fund Inc, titled “The High Dividend Yield Return Advantage” who theorized that the reinvestment of dividends
could be termed as a “bear market protector” and a “return accelerator” (Tweedy, Pg10).
However, I restricted the investigation into looking at the results of implementing a dividend oriented strategy
versus a growth oriented strategy (although not much is mentioned about growth in this document), which was a
decision many Kenyans would have had, to have made, given the background of the post poll violence.
Consequently the data sets collected begin on the first week of 2008 and 2nd January, 2008 was used as the starting
point for the brief study. Besides the two model portfolios (dividend & growth) other portfolios were constructed
based on some sectors such as diversified media shares or banking shares; however, they were largely used for
purposes of comparison. The two main portfolios examined were the ‘high earnings growth’ portfolio and the
‘dividend’ dubbed the ‘paycheck’ portfolio. A comparison between the total returns on both the portfolios was
taken to ascertain which portfolio would outperform the other given the challenges of the concluded elections
and the global trends at the time. The graph below illustrates the movements of the two portfolios during 2008
and shows the margin by which each portfolio had outpaced the other in terms of total returns.
*The 2nd of January, 2008 is the base date, Source: NSE pricelists
1 Generally getting information on the Kenyan capital markets prior to 1998 is extremely difficult. However, comprehensive
discussion papers have been written by the Kenya Institute for Public Policy Research and Analysis (www.kippra.org) since 2003
-1–
CCSFS RESEARCH • RESEARCH ANALYST: ALEXANDER MUIRURI
E-MAIL: RESEARCH@CREATIVECAPITAL.CO.KE • WEBSITE: WWW.CCSFINANCIALSOLUTIONS.COM
The paycheck portfolio closed the year 1.5% down while the growth portfolio closed the year 10.3% in negative
territory. Despite the growth outperforming the paycheck for 106 consecutive days between April 2008 and
September 2008, the paycheck outperformed the growth by 16 overall days by the years’ end. During the five
years prior to this the growth portfolio had outperformed the paycheck portfolio by over 4.2 times on the basis of
five year returns; but as the market dipped during at the beginning and toward the end of the year the dividend-
paying counters stood out. A key difference could be seen in the level of stability in pricing as the paycheck
portfolio that hosted a number of counters offering better income streams received higher confidence from local
investors. A quick look at the standard deviation between the total returns on both portfolios would reveal that
the paycheck portfolio exhibited less than 55% volatility attained by the growth and less than 35% of the volatility
attained by a portfolio modeled on the NSE 20 Share Index. An important observation made was that the growth
portfolio responded faster to market rebounds but lacked the necessary support during the periodic slumps. The
graph below charts the two portfolios in 2008 by the changes in their total returns to the stockholder.
*The 2nd of January, 2008 is the base date, Source: NSE pricelists
The remainder of this paper examines dividend investing by means of three themes namely: maximizing returns,
reinvestment of dividends and modeling an equity income portfolio. The main highlights of the paper are:
• Dividends are the trustworthy pacemakers that keep the heartbeat of your portfolio steady and maximize
its full potential;
• Dividends fit you with new legs to help you outrun inflation that is notorious in African markets;
• Dividends reinvestment is key to earning compounded returns, spreading risks on your portfolio and
providing spare change to take advantage of new opportunities; and
• Equity income funds may just inject the right mix of income and capital growth to keep you ahead of the
market and help you take control of your own returns during a year expected to be turbulent.
-2–
Introduction to the Nairobi Stock Exchange (NSE)
The Nairobi Stock Exchange is Kenya’s only stock exchange and has about 55 listed companies. The exchange was
constituted as a voluntary association of stockbrokers registered under the Societies Act (Source: NSE Handbook
2006). The stock exchange currently runs on an electronic trading platform known as the automated trading
system and is open daily for a six hour trading period. The stock exchange’s main market index is the NSE 20
Share Index and also has an aggregate index known as the NASI All Share Index. The exchange trades in
ordinary equity, preference shares and treasury bonds and has four companies cross-listed on regional stock
markets. Within the last few years the Nairobi bourse has grown from a market capitalization of Ksh112.59 b
($1.42 b) in 2002 to Ksh853.88 b ($12.38 b) in 2008 (it hit a peak of Ksh1.28 tn ($18.53 b) in June 2008). The graph
below summarizes the changes in market value between 1990 and 2008.
*Figures relate to end year values, Source: Nairobi Stock Exchange (NSE)
Timeline of key policy changes affecting dividends or returns at the NSE
During 1964-1970…dividend income was double taxed and because dividends were not deductible
expenses, corporate earnings distributed as dividends had a high effective tax rate. This made it more
expensive for corporations to provide adequate after-tax-return on equity and therefore the preference for
debt financing…(Rose Ngugi & Roline Njiru, 2005)
In June 1975, a capital gain tax was introduced and set at 36%; it was progressively reduced by 50% in 1981
and consequently by 25% in 1982.
In the 1974/75 fiscal year the rate of tax on dividends paid to non-residents was raised from 12.5% to 15%
and 20%. The rate of withholding taxes on resident dividends also went up to 15%.
The 1981/82 adjustments made on the capital gain tax saw only 50% of the net gains subjected to
corporation tax, such that with a corporation tax of 45% company paid only 22.5% of net gains as tax. For
individuals, tax on gain was progressive for 10% up to 35%. In addition, withholding tax on investment
shares was reduced from 35% to 15% aiming to boost the stock exchange. The capital gain tax was aimed at
generating additional revenue and curb excessive speculation.
In the 1990/91 fiscal year withholding tax rate of 15% on dividend income paid to residents was made final
tax in order to reduce incidence of double taxation on corporate dividends and incomes to individuals
arising from investment in securities.
Further all dividend and interest income to unit trusts were made subject to withholding taxes of 15% and
10%, respectively, such that this was a final tax not subject to further corporate or personal tax.
-3–
In 1992/93 the withholding tax on dividend income was reduced to 10% and rationalized with the rate
applicable to interest income.
In the 1996/97 fiscal year, withholding tax on dividend income was lowered from 10% to 5% for local
investors, while it went down to 7.5% for non-residents
Within the 1997/98 period to encourage equity in medium-sized companies with growth prospects, venture
capital funds were allowed to enjoy a 10-year tax holiday on their dividend incomes
In 1997/98 AIG Investments Kenya launched the AIG (East Africa) 27 Index, a new market capitalization
weighted index designed to track the total returns (capital gains plus dividends) of 27 companies listed on
the NSE. The index was started at a base of 100 points and is computed through an arithmetic mean
Current legislation and recent budget proposals
1. Resident banks are prohibited from paying a dividend if there are accumulated losses from prior years
(Central Bank of Kenya Prudential Guidelines for Institutions Licensed Under the Banking Act)
2. Currently any dividend received by a resident company, other than a dividend received by a company
which controls directly or indirectly less than 12.5% of voting power of the company paying the dividend,
shall be deemed not to be income chargeable to tax (Income Tax Act, 2007)
3. Dividends that remain unclaimed for more than seven years be paid to the Capital Markets Compensation
Fund (Budget Speech, Fiscal Year 2006/7)
4. All citizens of the East African Community Partner States (comprising Kenya, Tanzania, Uganda, Rwanda
and Burundi) who invest in the Nairobi Stock Exchange are treated as local investors where they earn
dividend income as residents and pay the withholding tax at the rate of 5% just like Kenyans (Budget
Speech, Fiscal Year 2007/8)
Introduction to dividends
Not many people know and even care about dividends due to the fact that investor education has not been a
priority in the Kenyan market. Dave Van Knapp (an author of books on stock investing) made some interesting
comments on perceptions of dividends stating that people largely find them uninspiring, a lack of creative
thinking on the part of the payer and reserved for a more mature investor. It is understandable that people would
feel this way given the Bull Run experienced in Kenya from 2003 to 2007; but, it was the get-rich-quick culture
that really cemented investing as a speculative activity. Sharp lessons over the past year have made people turn
away from the gambling game and place bets on dividends, holding a new deck of cards belonging to income
seekers. To learn how to invest in dividends we must first know what they are & what they should mean to you
Dividends are payments made by a company to its shareholders in reward for contributing capital. So the
dividend per share would be the amount of interest each share has earned (i.e., interest earned by an investor in
reward for buying a company’s shares) and is a percentage of the company’s earnings. Investors can multiply the
number of shares they own by the dividend per share in order to calculate the total receivable amount. According
to the Wikipedia website “when a corporation earns a profit or surplus, that money can be put to two uses: it can either be
re-invested in the business (called retained earnings), or it can be paid to the shareholders as a dividend. Many corporations
retain a portion of their earnings and pay the remainder as a dividend”. Some terms used numerously in this paper
include the dividend yield, which is simply the dividend per share divided by the price of the stock and the
dividend payout (or payout ratio), which is the percentage of earnings disbursed as dividends.
Dividends mean a lot of things to a lot of people; e.g., they may appear to be valuable only to retirees (as they are
income seekers); but, you’d find that the long term benefits accrue more to younger investors. While dividends
may be boring and uninspiring they can serve as a defensive against messy markets and accelerate long term
returns. While a firm who pays high dividends may be accused of having no long term prospects, these payments
serve as evidence that earnings exist in a real form and investors can be rewarded without ceding voting rights.
Multinationals repatriate profits through dividends and often use them as a source of funding for projects. Finally
dividends are important to investors who need income regularly to support themselves and others. The
important factor that sets dividends stocks apart is that they can offer income and above average capital growth.
-4–
THEME I: MAXIMIZING RETURNS
The graph below illustrates the impact dividends had on the two portfolios in 2008 and it is worthwhile noting
the wider margins on the paycheck portfolio whose returns proved to be superior during the bearish period.
*Base date for the graph was 2nd January, 2008 with an assumed initial capital outlay of Kshs. 1,000, Source: CCSfs estimates
The paycheck portfolio was victorious but still ended 2008 a loser; but, running a simple dividend reinvestment
strategy generated a more favorable outcome. The graph below tracks a scenario where dividends disbursed were
reinvested two weeks after cheques were in the mail. The product is an example of how returns are maximized!
*Base date was 2nd January, 2008 with an assumed initial capital outlay of Kshs. 1,000, Source: CCSfs estimates
-5–
Can High Dividend Yields Maximize Returns?
The research report by the Tweedy, Browne Fund Inc, (page 5) investigates the returns and market risk on a
number of portfolios ranked by their dividend yields. We have done the same below taking a sample of 35
companies and ranking them according to their respective average five year (2003 to 2007) dividend yields
(unfortunately we only covered a very short period). The counters excluded from the exercise included those who
had not paid dividends between 2003 and 2007, those in the Alternative Investment Market (AIMS) as well as
those who could not provide a five year return history (meaning all IPO counters listed since 2006). The exercise
was supposed to examine the returns on each portfolio, the aggressiveness of the dividend policy as well as the
risk return tradeoff based on the average five year dividend payout. The portfolios were sorted into seven tiers
with five stocks in each tier and the purpose of the exercise was to see which tier would score the lowest score.
According to Tweedy research paper it was not the high yields that gave the best compound returns but a high
yield coupled with a slightly lower payout ratio. Despite the interesting findings below there was little (but
negative) correlation between total returns and payout ratios (-0.35) and even less with dividend yields (-0.16).
*Composition of the 7 Tiers can be found in the Appendix on page 17, Source: CCSfs estimates
The findings indicate the tier with the highest dividend yield scored best in
terms of the risk return tradeoff, where it had the lowest risk as measured by the Dividend Yield vs 91 day T-Bill
coefficient of variation (CVAR). According to the Investopedia website “the
coefficient of variation represents the ratio of the standard deviation (risk) to the mean
(average dividend payout)… In the investing world, the coefficient of variation allows
you to determine how much volatility (risk) you are assuming in comparison to the
amount of return you can expect from your investment…”.
In this case the calculation used is as follows:
Coefficient of Standard Deviation
Variation = Average Five Year Dividend Payout
The lower CVAR indicates that Tier 1 carries the lowest risk for the average
percentage payout. The findings also indicate that that Tier 1 scored second
*Data set for average 91 day T-Bill
highest in terms of dividend payout roughly retaining 20% of earnings meaning Rate included the following:
the dividend policy is fairly aggressive. This particular statistic compliments the <2003; 1.40%>, <2004; 8.30%>,
earnings yield indicating that Tier 1 exhibits higher returns on equity as it earns <2005; 8.14%>, <2006; 5.83%>,
<2007; 6.87%>
a high yield despite retaining far less than Tier 4 and 6. Tier 1 finally ranks third Source: Economic Survey 2008
highest average annual returns for the five year period and based on its
Taking into account the with-
composition largely comprises of companies in the Industrial & Allied Sector.
holding (final) tax on local
Growth companies comprise a large population of the best performing tiers; i.e.,
residents the Tier 1 yield
Tier 5 and 6 (in terms of average annual return) and more likely the beneficiaries
drops to 6.00% which still
of high investor confidence after the euphoric 2002 elections. The results above remains a good alternative as
do not much exhibit much correlation between the average annual returns and an equity income fund to the
the average dividend yield. The return variance between Tier 1 and Tier 2 would 91 day T-bill (risk free) rate
indicate that a higher yield attracts better returns than a higher payout ratio.
-6–
THEME II: REINVESTMENT OF DIVIDENDS
Long Term Returns and Inflation
A characteristic that attracts investors to short term government papers is the ability to maximize returns by
earning compounded returns on reinvested income. We undertook another exercise where we aimed to look at
the long term benefits of investing for dividends by using a 10 year data set to examine the long term returns on
the paycheck portfolio (a ten year investigation was chosen because getting information prior to 1998 was
difficult). The purpose of the exercise would have been to investigate the returns on an annual basis assuming
that dividends were reinvested at the end of each year. The other assumptions made were that the stockholder
would participate in all bonus and rights issues during the period and wouldn’t liquidate any shares.
The results of the exercise revealed that the capital returns and total returns without reinvestment were fairly
similar and represented a scenario common amongst Kenyan investors who consume their dividends. However,
total returns with reinvestment yielded about 50% more in compounded returns as dividends earned more and
were subject to the same corporate actions (such as bonus issues) that increased shareholders’ wealth without
redeeming part of the investment. However, within the 1999 to 2002 period return growth was almost zero
meaning that despite the reinvestment of dividends the portfolio would still follow the general economic trends.
*Average annual Inflation figure for 2008 relates to November 2008

Source: CCS estimates, NSE, Economic Survey 2004-2008
In September 2008 CCSfs market update we saw the return on the paycheck portfolio finally hit zero (after an
impressive rally a few months earlier). We were able to recognize that the dividend counters tended to exhibit
character traits of fixed income instruments where the stockholder was able to maintain his/her capital at
relatively the same level while reaping tangible income. The stability in pricing was attributed to the fact that
many stockholders were not willing to give up the chance of getting dividends in the future. The payment of
dividends on a regular basis or fairly predictable manner meant that each counter supported the other as the
respective books closure dates expired over a large span of time.
-7–
Given that inflation statistics at the time (average annual inflation for July 2008, August 2008 & September 2008
was 19.55%, 20.79% & 22.12% respectively) the portfolio would fall victim to negative real returns. This is a
phenomenon that affects all fixed income securities but the dividend portfolio may have a way of overcoming
this weakness. A quick investigation back 10 years reveals that the dividends paid by the paycheck portfolio grew
an average rate of 16.97% per annum against the average annual rate of growth in inflation of 10.44%, thus the
portfolio yielded a positive return. Beating inflation is not guaranteed and several bondholders in Kenya will
assess this risk carefully before making a decision as the fixed coupons on offer remain constant. “When
inflationary pressures bite and negative market perceptions prevail the need for more income you can touch & feel becomes a
priority for ordinary people (particularly those with short term investment objectives)” (CCSfs market update 16 Sept).
Source: Central Bank of Kenya
Apart from the inflation risk

mentioned above stockholders of Trade statistics for the two portfolios and the NSE in 2008
dividend oriented counters face
considerable liquidity risk. The
risk arises largely due to the
stability of the shareholding.
Incidentally the stocks in the
paycheck portfolio have a lower
free float, largely foreign owned
(by multinationals) and are in
their mature growth stage. A
discussion paper from the Kenya
Institute for Public Policy
Research and Analysis mentioned
the following “The trading volume
results show that the activities of the
secondary market were however
dominated by the minority
shareholders…It would therefore
seem that the top shareholders
controlling over 50% of company
*Only preliminary figures for turnover and volumes were available
shares are inactive in the secondary Source: NSE, CCSfs estimates
market, showing preference for Turnover ratio is the ratio of the annual/monthly turnover to market capitalization.
dividend income to capital gains. This The higher the value the higher the transaction value.
may explain the low liquidity in the The trading volume activity ratio (TVAR) is the ratio of the annual/monthly volume
secondary market and low supply of to the average number of shares outstanding.
securities for trading” (Rose Ngugi) The higher the number the more active the share.
-8–
Short term dividend investors would also experience other market risks if they intend for buy a stock solely for its
dividend especially when disposing it. For example “generally over the past three years the EABL share has dipped
13% the week after the ex div date” (CCSfs market update 17 Oct). Taking a look at historic five year price trends
immediately following the books closure dates for most interim dividends the price decline was evident. Other
counters such as Total Kenya (a high yield counter) come alive for only three months in a year between the
dividend announcement date and the books closure date. The findings indicate the prices in the paycheck
portfolio tend to dip. The table below examines the interim and final dividends paid by the paycheck constituent
counters and the prices changes 5 days (5D) before (cum div) the books closure dates and 5 days after (ex div).
Source: CCSfs estimates
The findings for final dividends, which tend to be the largest in size, indicate that recently share prices generally
dipped following an ex div announcement. Many analysts argue that this should be the case as the market value
corrects itself to compensate for the loss in market value as a result of distributing the cash dividend. However,
it’s also likely that the demand for the shares drops as the incentive to purchase the shares is diminished.
Whatever the case a historical look at dividend counters reveals that holding onto your portfolio may entitle you
to some cool freebies.
Bonuses issued at the NSE - 15 year history Taking a look at the historical issues of bonuses
shares reveals that the six companies (out of
over 50 listed firms at the NSE) that comprise
the paycheck portfolio accounted for 20% of the
recapitalization issues and testifies to their
superior reserves. Most the bonus issues were
capitalized from revenue reserves and would
enable the holder to grow his wealth without
making additions to his original investment.
The following is an extract from a previous
CCSfs market report. “Over the past number of
years the frequency of bonus issues has increased
implying that management is happy to bear the cost
of issuing bonuses shares (i.e., listing & registrar
fees, etc… these costs are shouldered by
shareholders) as opposed to distributing cash. For
example, the EABL bonus issue cost the
shareholders Kes4 m in total costs, a figure that can
be considered insignificant considering the
company’s size. While stock dividends may have
interrupted dividend policies, they have also
resulted in much of the dividend growth over the
Source: NSE, CCSfs estimates
last few years”. (16th September market update)
-9–
Simple Reinvestment Strategies
The following is an extract of the CCSfs market report for 7th October, 2008
All this talk about dividends it would be pointless if you couldn't provide effective strategies as to what you
would do with the dividend cheque. Last time we introduced the concept of the dividend reinvestment plan, a
strategy a listed company or brokers can employ to ensure dividends are reinvested wisely and in a cost effective
manner. While most investors prefer not to reinvest dividends, it may be in an investors’ best interest to take
advantage of the opportunities in the market. I possible strategy for reinvesting dividends for small retail
investors would involve reducing the impact of price fluctuations by averaging the purchase consideration. There
are two common methods of averaging and are often applied in many dividend reinvestment plans globally. The
two methods involve either making periodic purchases of shares or making a purchase of additional shares if the
stock's price (or market index) falls.
Periodic Purchases
Under this plan, the investor uses his dividend money to buy additional shares of a particular stock at regular
intervals. For example, the investor may decide to buy a certain number of shares either quarterly, monthly, etc...
(depending on the investors preferences). The general idea is to buy the stock at regular intervals irrespective of
the prevailing market value and this technique is referred to 'dollar cost averaging' in the many (American-based)
textbooks. The consequence of adopting this strategy is that over time a buyer may benefit from a lower average
cost per share if they think that market prices generally will decline over time.
The table below is an example of how this concept can be applied. Taking a simple example, if Ksh300,000 was
invested in the 'paycheck' portfolio approximately Ksh12,541 worth of dividend cheques would have been
available by 5th September, 2008 (according to company announcements); i.e., this assumes that investors would
have all the dividend cheques paid from final dividend for 2007, interim dividend from East African Breweries
and the first interim dividend from British American Tobacco in 2008. Taking into account postage complications
and time for banking the cheques, the funds for reinvestment would realistically be available by 19th September,
2008. So if an investor decided to invest the Ksh12,541 in KCB Group starting on 19th September, 2008 and
purchasing 100 shares after every two trading days then the average cost per share would be Ksh26.31 versus
Ksh26.75 on 19th September, 2008.
Source: CCSfs, NSE

Benefits of strategy
• On 19th September, 2008 - 400 shares bought at Ksh26.75 resulting in a Ksh10,700 capital outlay
• Over four trading periods (two trading periods apart) - 400 shares bought at Ksh26.31 resulting in a
Ksh10,524 capital outlay
Therefore a saving (extremely small saving) would materialize. However, the strategy can back-fire if over the
trading periods the average cost per share rises due to a market rebound. This particular strategy would be
effective if a clear price trend could be established and the counter displayed low volatility.
- 10 –
Averaging Down
To counter the drawbacks of the previous plan, in this case an investor buys shares only if the price declines or a
major market indicator indicates that the share will drop. In the example below, we assume that we are still
investing the Ksh12,541 but this time in a more volatile growth share. In this case a portfolio manager may have
concluded that the NSE index had begun to stabilize between 22nd September, 2008 and 26th September, 2008,
but the index continued to slide. The portfolio manager then decides that given the current trend there might be
an opportunity to buy Access Kenya at a lower average cost in the following week. The table below highlights the
savings on purchasing Access Kenya the week after a trend in a major market index has been identified.
Source: CCSfs, NSE
Source: CCSfs, NSE
In the above case the saving was sufficient to even cover the stock brokerage cost.
The 'smart alec' (no pun intended), talented, technical analysts at many of the Kenyan investment banks also
employ more graphical means for identifying price trends with a view of enabling them to accumulate stock by
taking advantage of short term price fluctuations. These technical analysts attempt to predict the future
movement of highly volatile counters such as Equity Bank by predicting patterns such as reversals (graph 1) or
ascending triangles (graph 2) that indicate that the stock may appreciate in the future. The portfolio manager then
decides that given the current graphical patterns there might be an opportunity to buy Equity Bank now in
anticipation of a trend reversal or bullish run in the future. In this case we can assume that the investment
was Ksh3,000,000 (to afford the share) so that the dividend being reinvested was Ksh125,410. The table on page 12
highlights the savings on purchasing Equity Bank the week after predicting a future trend.
Source: CCSfs, NSE
- 11 –
Source: CCSfs, NSE
In the above case the saving was sufficient to cover the stock brokerage cost. It is interesting to note that in all the
above scenarios we were using dividends from the paycheck portfolio to make purchases in the growth portfolio.
This means an investor can now have a portfolio with the combined characteristics of high growth and income.
So far we have restricted all our reinvestment strategies to our local market because we have the capacity to
understand them better; however, there are some regional markets that offer higher dividend yields than Kenya.
Below are a few examples of selected yields available as at 31st December, 2007 within selected regional markets.
Source: JSE Source: Dar es Salaam Stock Exchange (DSE)
Source: Lusaka Stock Exchange (LUSE) Source: Uganda Securities Exchange (USE)
A drawback to reinvesting in a foreign market is that you’ll have to rely on foreign expertise to base your
decisions on. It is advisable that before you enter any market you should be aware of possible risks, for example:
• We have all seen what damage inflation and currency2 risk has done to foreign investors in Kenya
particularly those who invested in Safaricom, so one has to have a remedy to counteract such risks.
• Countries such as South Africa and Zambia still face a high political and economic risk (in that order) as a
result of regime change and the slump in the commodities (largely metals) market globally.
• Closer to home Ugandan investors face liquidity risks due to low free float at the USE while investors in
Tanzania face transaction risks resulting from strict rules on foreign participation and exchange controls.
2 In a final report to investors dated 29/12/2008, fund managers at Tweedy, Browne Fund Inc acknowledged they had made a capital
gain in 2008 solely due to forward currency contracts to protect their shareholders from currency fluctuations in foreign markets.
- 12 –
THEME III: EQUITY INCOME FUNDS
Given the current trends in the market, institutions such as pension funds in Kenya who invest about 20% of their
funds in the stock market are in crisis while those holding cash at the bank are effectively losing money in real
terms to inflation. Equity income funds may be a viable option for income seekers that is of medium risk on the
risk pyramid and can be structured to provide an above average (rising) level of return in the long term. The idea
has been tested through the Dogs of the Dow strategy as well as the Tweedy Value Funds, but the problem may
be finding the right model to structure such a fund. It is possible to construct a fund based on the NSE 20 Share
Index which according to a study done in 1992 by Professor J. H. Kimura has a “correlation coefficient3 of 0.91 to the
market capitalization meaning that it captures over 80% of all value movements on the entire Nairobi Stock Exchange”.
However, the dividend profile of the main NSE Index has changed as a result of the recent equity boom.
*All NSE Index values above are in Kenya Shillings Billion (Ksh1 b = $13 m), Source: NSE, CMA Annual Report 2001, CCSfs estimates
The five year equity boom that began in August 2003 stemmed from the shift in the Government of Kenya’s
monetary policy. Borrowing a leaf from the Economic Survey 2004 “the capital market increased activity can be
explained by improved investor optimism and preferred capital gain return relative to the falling risk free treasury bill rates”.
Indeed the NSE Index earnings yield for 2003 was higher than the 91 day T-bill rate providing evidence that the
risk premium was adequate compensation for institutional investors willing to migrate from other asset classes
(during 2003 the Index rose 100%, the highest annual increase since 1994). Since 2003 the yield profile of the Index
has deteriorated as payout ratios dropped. Since 1992 the index has been revised six times and more recently
many firms with increasingly conservative dividend policies have been incorporated into the main market index.
The other index that is geared toward capturing the market is the AIG (East African) 27 Share Index that includes
dividends in its formulation. Despite the Index being market capitalization weighted (while the NSE Index is
equally weighted) the correlation between the two indices is approximately 0.935 (according to CCSfs estimates).
Perhaps the best strategy would be to design an equity income fund based on the yield profile as was created in
the exercise on page 6 to ensure that you’d be able to effectively calculate its risk and outcome as well as regulate
its composition. However, as was mentioned in the AIG Investment Presentation the usefulness of using an index
fund is the ability to use the index “as a benchmark for evaluating performance”. Irrespective of the benchmark used
equity income funds may be your most practicable avenue for avoiding the stock appreciation drought expected
in 2009 as the world enters into recession. The tables on pages 14 and 15 illustrate the simple criterion used to
construct and track a model portfolio; however, no technical or fundamental approach was adopted in its design.
3 Professor J.H.Kimura based his findings on data collected between 1974 and 1990 and constructed a market capitalization index that
was plotted against the NSE Index. The purpose of the study was to design an index of 20 firms to map the stock markets’ performance
- 13 –
INTRODUCING THE MODEL PORTFOLIOS: GROWTH STOCK PORTFOLIO (HIGH EARNINGS GROWTH ORIENTED)
Interim EPS Growth in 2008 Annual Growth in Dividend 5 Year Avg. Total Returns
Company Cap. Size Sector 1 Qtr 2 Qtr Half Year 3 Qtr Revenue Profit Payout Annual Return 3 Years 5 Years
Access Kenya Small Cap. Commercial - - 47% - 53% 172% 36% - - -
Scangroup Small Cap. Commercial - - 36% - 58% 23% 35% - - -
Diamond Trust Bank Small Cap. Financial 28% 38% 34% 29% 56% 42% 30% 55% 399% 612%
Equity Bank Medium Cap. Financial 81% 306% 196% 138% 73% 151% 29% - - -
Kenya Commercial Bank Medium Cap. Financial 64% 74% 69% 69% 26% 22% 47% 64% 319% 762%
NIC Bank Small Cap. Financial 30% 46% 38% 52% 21% 63% 31% 53% 285% 680%
Athi River Mining Small Cap. Industrial - - 23% 23% 49% 64% 29% 60% 301% 524%
East African Cables Small Cap. Industrial 44% -16% 13% 71% 70% 32% 49% 124% 166% 3040%
Average: 49% 90% 57% 70% 51% 71% 36%
*Scangroup and Equity Bank were listed in 2006 while Access Kenya went public in 2007. Annual revenue and profit growth refers to the 2007 financial year
Source: Respective company interim financial statements (all interim results are unaudited), CCSfs Research estimates
• The portfolio represents firms with a recent history of rewarding stockholders with higher stock returns but have lower payout ratios.
• The portfolio leans more toward the financial sector, includes a number of newly listed firms and exhibits high quarterly EPS growth.
• The firms in the portfolio are largely owned by Kenyans (by local individuals than firms) and generally have a higher level of float.
• The portfolio is over diversified to reflect the high risk profile attached to some firms that have not stood the test of time on the NSE.
• ARM, KCB and Scangroup represented the anchoring stocks that were meant to stabilize the portfolio against the other volatile counters.
INTRODUCING THE MODEL PORTFOLIOS: PAYCHECK PORTFOLIO (DIVIDEND ORIENTED)
Interim EPS Growth in 2008 Dividend Annual Growth in 5 Year Avg. Dividend
Company Cap. Size Sector 1 Qtr 2 Qtr Half Year 3 Qtr Policy Revenue Profit Payout Growth
Nation Media Group Small Cap. Commercial - - 11% - Stabilization 21% 39% 77% 32%
Standard Chartered Bank Medium Cap. Financial 23% -19% 0% 4% Stabilization 21% 34% 92% 13%
Bamburi Cement Medium Cap. Industrial - - 29% - Hybrid 34% 38% 86% 5%
British American Tobacco Small Cap. Industrial - - 5% - Stabilization 21% 15% 112% 17%
East African Breweries Large Cap. Industrial - - - - Hybrid 26% 23% 73% 86%
Total Kenya Small Cap. Industrial 22% 179% 113% 85% Residual 13% 8% 83% 9%
Average: 32% 23% 26% 87% 27%
*Annual revenue and profit growth refers to the 2007 financial year except for East African Breweries whose results reflect the 2008 financial year
Source: Respective company interim financial statements (all interim results are unaudited), CCSfs Research estimates
• The dividend portfolio represents companies with a long history of paying regular dividend income or high yielding dividend income.
• It leans more toward the industrial sector and all counters have been in the NSE 20 Index for over 15 years (Total was replaced in 2008).
• The counters in the portfolio have a lower free float & total 3 year return and are owned largely by foreigners (i.e., multinationals).
• The portfolio consists of fewer firms (only 6) that are considered to be highly stable, well-run and have a reliable profit history.
• Total Kenya and BAT represent the anchoring stocks that were meant to stabilize the portfolio (make less volatile) while offer good returns.
- 14 –
SIMPLE TRACKING OF THE TOTAL RETURNS ON ANY MODEL PORTFOLIO THAT YOU CREATE

Investment Value Paper Dividends Proposed Interim Dividends Proposed Total Total
02-Jan-08 31-Dec-08 Gain Return 1st Payment Ex Div Date Payments Ex Div Date Dividends Income Return
1 Access Kenya 120,000 115,814 (4,186) -3% 1,591 09-May-08 0 1,591 (2,595) -2.2%
2 Scangroup 120,000 110,442 (9,558) -8% 3,632 20-May-08 0 3,632 (5,926) -4.9%
3 Diamond Trust Bank 120,000 89,348 (30,652) -26% 1,735 30-May-08 0 1,735 (28,917) -24.1%
4 Equity Bank 120,000 149,787 29,787 25% 1,617 04-Apr-08 0 1,617 31,404 26.2%
5 Kenya Commercial Bank 120,000 113,919 (18,181) -14% 2,902 27-Mar-08 0 2,902 (15,279) -11.6%
6 NIC Bank 120,000 84,194 (35,806) -30% 1,471 03-Apr-08 460 12-Sep-08 1,931 (33,876) -28.2%
7 Athi River Mining 120,000 116,774 (3,226) -3% 1,532 28-May-08 0 1,532 (1,694) -1.4%
8 East African Cables 120,000 74,118 (45,882) -38% 2,414 21-Mar-08 0 2,414 (43,468) -36.2%
960,000 854,396 (117,704) -12% 16,894 460 17,353 (100,350) -10.3%
1 Nation Media Group 160,000 148,645 (11,355) -7% 3,677 16-May-08 1,471 29-Aug-08 5,148 (6,206) -3.9%
2 Standard Chartered Bank 160,000 136,898 (23,102) -14% 4,064 03-Apr-08 4,064 4 Sep / 4 Dec 8,128 (14,973) -9.4%
3 Bamburi Cement 160,000 137,500 (22,500) -14% 396 28-Mar-08 2,533 05-Sep-08 2,929 (19,571) -12.2%
4 British American Tobacco 160,000 158,788 (1,212) -1% 12,091 22-Apr-08 5,182 15-Aug-08 17,273 16,061 10.0%
5 East African Breweries 160,000 142,222 (17,778) -11% 2,252 28-Mar-08 5,301 09-Oct-08 7,553 (10,225) -6.4%
6 Total Kenya 160,000 167,869 7,869 5% 12,459 28-May-08 0 12,459 20,328 12.7%
960,000 891,923 (68,077) -7% 34,939 18,552 53,491 (14,587) -1.5%

*All figures above are in Kenya Shillings, Source: CCSfs estimates
KEY ASSUMPTIONS
1. The initial investment was Ksh1 m (18k for brokerage commissions) and was to be spread equally amongst the counters in each portfolio
2. Dividend income was recorded on the date immediately after the books closure date
3. Withholding tax rate applied on dividend income was 5% of the total disbursement
4. Investors participated in all corporate actions and they were recognized at their respective books closure dates
COMMENTARY
1. The last time we observed the two portfolios (refer to the CCS market report for 16th September 2008) the paycheck portfolio had been
outperformed on a capital growth basis but had come up on top in total returns (due to dividends that had been paid at the time). However,
by the years’ end the paycheck portfolio dominated on both fronts with dividend income meeting up to 78% of the paper loss
2. East African Cables, NIC Bank and Diamond Trust Bank were the worst performers; but, Equity Bank provided the much needed balance
3. The growth portfolio was purposely over-diversified (covering the sectors more broadly) to limit pricing tendencies inherent in any
particular sector. The high interim EPS were expected to support prices every quarter as investors reacted to better-than-expected earnings
4. The dividend portfolio performed better overall as dividend income supplemented the decline in market value of the portfolio. The biggest
dividend contributors were Total Kenya and BAT (who incidentally have the highest yielding dividends) and Standard Chartered Bank
contributed the most payments (comprising 2 interims and 1 final). REMEMBER: All dividends were paid at the discretion of the Board.
- 15 –
Conclusions
o Dividend oriented stocks outpace growth portfolios when times get rough and are the
glue that keep your returns positive because of the income they provide. Whereas you
can only rely on supernormal capital growth during booms, dividends are designed to
last in any weather.
o Dividend portfolios operate much like hybrid portfolios (that mix equity and bonds, for
example) ensuring stability through regular income while achieving capital appreciation
at above market average rates.
o We have seen that certain types of high dividend yield portfolios can offer above
average returns while maintaining a low risk profile.
o Research has shown that long term investment in a dividend portfolio may yield gains
within a high inflation environment insofar as there is dividend growth.
o We discovered that dividend reinvestment is a useful strategy in growing capital and

enables an investor to earn compounded returns.
o Equity income fund may possess the key to surviving chaotic market and can be
customized to beat returns from the major indexes.
o At a time when markets are falling and recessions are around the corner it’s a good idea
to invest in companies that hold a large amounts of cash. Companies with stable
dividend policies hold adequate cash and that is often the reason many pension funds
are attracted to them (it is interesting to note that other than the holding companies, the
state run pension fund (NSSF Board of Trustees) has dipped its fingers into all the
counters in the paycheck portfolio excluding Total Kenya)
- 16 –
APPENDIX
Introduction to the NSE main market Index
Source: NSE
Composition of the High Dividend Yield Tiers (on page 6)
Tier 1 British American Tobacco, Total Kenya, Rea Vipingo Plantations, East African Cables, East African Breweries
Tier 2 Standard Chartered Bank Kenya, Carbacid Investments, BOC Kenya, Unilever Tea, Barclays Bank Kenya
Tier 3 Mumias Sugar, Nation Media Group, Jubilee Holdings, National Industrial Credit Bank, Bamburi Cement
Tier 4 Car & General, Kenya Airways, Crown Berger, Sameer Africa, East African Portland Cement
Tier 5 Centum Investments, Kenya Commercial Bank, Pan African Insurance, Diamond Trust Bank, Sasini
Tier 6 Athi River Mining, TPS Eastern Africa, CFC Stanbic Bank, CMC Holdings, Marshalls (East Africa)
Tier 7 Kenya Oil Company, Kenya Power & Lighting, Kakuzi, Standard Group, Housing Finance
Source: NSE, CCSfs estimates
Corporate Actions for the Paycheck Portfolio influencing Long Term Returns (on page 7)
Year Company Type Ratio Price Books Closure

2000 Standard Chartered Bank Bonus Issue 1:2 20-Mar-00
British American Tobacco Bonus Issue 1:3 20-Mar-00
2001 Total Kenya Bonus Issue 1:2 30-Apr-01
2002 Total Kenya Rights Issue 2:3 18.00 04-Jan-02
Nation Media Group Bonus Issue 1:2 24-May-02
2004 Standard Chartered Bank Bonus Issue 1:10 25-Mar-04
East African Breweries Bonus Issue 1:5 06-Oct-04
East African Breweries Share Split 5:1 26-Nov-04
2005 Nation Media Group Bonus Issue 1:3 13-May-05
2007 East African Breweries Bonus Issue 1:5 12-Oct-07
2008 Nation Media Group Share Split 2:1 25-Jul-08
Source: NSE
- 17 -
Composition of the NSE 20 Share Index and Amendments Since 2007
*Market Capitalization (MKT CAP) and P/E was recorded as at 31st December, 2008 - Source: NSE
Composition of the AIG (East Africa) 27 Index
Agriculture Sector Commercial Sector Financial Sector Industrial Sector

Sasini Access Kenya Barclays Bank Athi River Mining
Rea Vipingo CMC Holdings CFC Bank Bamburi Cement
Kenya Airways Diamond Trust Bank BAT Kenya
Nation Media Housing Finance EA Breweries
TPS Serena KCB EA Cables
Safaricom ICDC Investments KPLC
Scangroup NIC Bank Kengen
Standard Chartered Mumias Sugar
Kenya RE Kenol
Source: AIG Investment Kenya
- 18 -
EAST AFRICAN BREWERIES:SHARE MOVEMENT (Sept 08–Jan 09) TRADING HIGHLIGHTS
Source: NSE Pricelist, CCS Financial Solutions, www.eabl.com

Shareholding Structure
Year End Jun-08
Diageo Kenya 42.82%
Board of Trustees NSSF 4.69% Div Value 5.65
Diageo Holdings Netherlands BV 4.55% Div Type Final
Guiness Overseas Ltd 2.61% Cum Div 29-Aug-08
Other Shareholders 45.33% Ex Div 09-Oct-08
Trading Summary
EABL counter shows the true impact dividends have on share price stability.
Almost immediately after its final (which was 283% of Ksh2.00 par value) the
share tanked losing more than 30% of its value within a span of 20 days.
However, this resulted in an RSI value lower than 2 indicating that by the end Source: Company Reports, NSE Pricelists
of October 2008 it had been grossly oversold – the market quickly corrected
itself the following week. Currently no buy signals have been observed. Key Share Information
Company Prospects
o Company was expected to increase marketing spend to maintain Sector Beverage
market share and establish new brands such as Alvaro being tested in Latest Share Price Kes 139.00
the Kenyan market by Diageo Plc 52 Week Low – High 107 - 220
o Recent capital investments include a SAP platform and additions to PPE Market Capitalization Kes 110 bn
to increase cost efficiency to enable the high profit margins. EABL has Shares Issued 791 mn
a good source of financing & low capex spend, so dividends are secure Foreign Shareholding 53.54%
o Mainstream brands expected to perform well while more emphasis is Book Value/Share Kes 25.27
placed on emerging brands-securing more markets regionally & export Market (P/E) 13.94
contracts abroad to reduce exposure to Kenyan economy Industrial (P/E) 13.09
o Building bottling capacity to diversify business and expand production Company (P/E) 14.55
o EABL is still a mature firm with a large market share, facing low Price/Book 5.39
competitive pressure and thus not aiming to retain much of its earnings Free Float 45.20%
o Focus in future will be on implementing key marketing initiatives Support (Buy) Kes 130.00
managing inflationary and fuel pressures, procuring low cost inputs and Resistance (Sell) Kes 165.00
competing effectively for the share of the consumers wallet 2008 EPS 9.55
Key Dividend Statistics in Kenya Shillings (Exchange Rate ‐ US$ 1 = Kes 79.7567 ) 2008 DPS 8.05
Year Ended 30th June 2004 2005 2006 2007 2008 Earnings (%) Up 23%
Earnings Yield 10.47% 6.49% 5.68% 6.35% 5.84% Statistics as at 30th June 2008
Dividend Yield 6.22% 4.03% 4.10% 5.26% 4.92%
Div. Yield 5 yr Avg. 4.20%
Div. Growth 5 yr Avg. 46%
Price to Earnings Ratio 9.6 15.4 17.6 15.7 17.1
Consecutive Div. Rise 13 Years
Dividend Payout 59% 62% 72% 83% 84% Total Return-12 Mnths 52%
Interim Dividend Per Share (Kes) 0.52 1.25 1.46 1.83 2.40 Total Return-3 Years 61%
Final Dividend Per Share (Kes) 2.37 2.50 3.46 4.58 5.65 Total Return-5 Years 542%
- 19 - CCSfs Research – www.ccsfinancialsolutions.com

BAMBURI CEMENT: SHARE MOVEMENTS (Sept 08 – Jan 09) TRADING HIGHLIGHTS
Source: NSE Pricelist, CCS Financial Solutions, www.bamburicement.com

Shareholding Structure Year End Dec-08
Fincem Holdings 29.30%
Div Value 3.20
Kencom Holdings 29.30%
Div Type Interim
Board of Trustees NSSF 16.68%
Bamcem Holdings 13.78% Cum Div 07-Aug-08
Other Shareholders 10.94% Ex Div 05-Sep-08
Following the payment of its interim dividend (64% of Kes5.00 Par Value) the
share dropped moderately by 7%. The management had already warned that
they would prioritize reinvesting cash in the business in June so investors
slowly lost interest as they knew no second interim dividend was going to be
offered. Among the counters in the paycheck portfolio, Bamburi has the least
Source: Company Reports, NSE Pricelists
appealing dividend profile, but due to the Lafarge shareholding (represented
by Fincem, Kencom & Bamcem) investors can be assured that the French Key Share Information
multinational will continue to repatriate profits (in the past dividends have
Sector Construction
been paid from reserves severally when earnings have not been sufficient). A
Latest Share Price Kes 160.00
big problem is the lack of float (liquidity) as only 11% of shares are traded.
52 Week Low – High 155 - 205
Company Prospects Market Capitalization Kes 58 bn
As was evident from their half year earnings statement the cement market Shares Issued 363 mn
leader will continue to post higher profits in the future. The demand for Foreign Shareholding 72.38%
cement still remains high within the region and the company is looking to Book Value/Share Kes 44.07
expand its current capacity to meet this demand. The company has a low Market (P/E) 13.94
gearing ratio so the final dividends to shareholders may not be comprised in Industrial (P/E) 13.09
funding the expansion; but, 2008 will see a lower payment consisting of only Company (P/E) 16.15
1 interim & 1 final dividend (a decision was made to funded capex internally) Price/Book 3.63
Free Float 10.94%
Since 2002 Bamburi has paid $152m dividends & the market cap. has grown
Support (Buy) Kes 150.00
from $390m to $1.0bn. Key to Bamburi’s future is its ability to reduce its
Resistance (Sell) Kes 200.00
production costs. Whereas items such as electricity & transport costs may be
out of their hands, the discovery & exploration of limestone / coal deposits 2007 EPS 9.91
should help in derive crucial savings in clinker production and coal imports. 2008 DPS 5.28
HY 2008 Earnings (%) Up 29%
Year Ended 31st December 2004 2005 2006 2007 HY 2008 Statistics as at 30th June 2008
Earnings Yield 4.28% 4.70% 4.06% 4.82% 5.40% Div. Yield 5 yr Avg. 3.61%
Dividend Yield 5.54% 4.51% 3.10% 2.92% 1.64%
Price to Earnings Ratio 23.4 21.3 24.7 20.7 18.5
Total Return-12 Mnth 4%
1st Interim Dividend Per Share (Kes) 1.12 1.80 2.00 2.00 3.20 Total Return-3 Years 64%
2nd Interim Dividend Per Share (Kes) 5.00 3.50 2.00 3.50 Total Return-5 Years 181%
Final Dividend Per Share (Kes) ‐ ‐ 1.50 0.50

STANDARD CHARTERED BANK: PRICE CHANGE (Sept 08–Jan 09) TRADING HIGHLIGHTS
Source: NSE Pricelist, CCS Financial Solutions, www.standardchartered.com/ke

Standard Chartered Holdings (Africa) 73.81% Div Value 2.50
Kabarak Ltd 1.03%
Div Type Interim
KCB Nominees – A/C 744 0.51% Cum Div 10-Nov-08
Other Shareholders 23.96% Ex Div 03-Dec-08
Trading Summary
After the ex div date on the 1st interim dividend of Ksh2.50 on 4th September,
2008 the share predictably dipped by over Ksh15.00; however, lucky the
board announced a 2nd interim dividend in November that temporarily halted
the decline. Curiously between cum div and ex div date in December the Source: Company Reports, NSE Pricelists
share continued to dip in line with the market index. The lack of support may
have resulted from capitulation as extremely low volumes were recorded in Key Share Information
November 2008. Currently the share is trading at par with the 30 day SMA.
Company Prospects Sector Banking
o Since a Kenyan CEO came on board the shift in focus has resulted an Latest Share Price Kes 164.00
expanded loan book which may result in increased investment. Unless 52 Week Low – High 147 - 236
externally funded the expansion strategy in 2009 may reduce the DPS Market Capitalization Kes 45 bn
o Adoption of modern technology (software) and banking equipment to Shares Issued 272 mn
speed up modernization process. Foreign Shareholding 73.81%
o Competition for deposits will remain high with the domestic banking Book Value/Share Kes 41.59
sector meaning interest margins may continue taking a hit. Market (P/E) 13.94
o Liquidity problems in the financial system may persist a bit longer, Financial (P/E) 16.58
but as smaller regional banks struggle to keep up, opportunities to Company (P/E) 13.51
acquire new businesses may arise. Price/Book 3.94
o Corporate financing arrangements to accelerate as Kenya become the Free Float 25.16%
financial hub of East Africa. Support (Buy) Kes 150.00
o Since 2002 the bank has paid $169m in dividends & the market cap. Resistance (Sell) Kes 180.00
has grown from $309m to $761m. Final dividend grew at 24% per year 2007 EPS 12.14
Year Ended 31st December 2004 2005 2006 2007 HY 2008 HY 2008 Earnings (%) Up 0.4%
Earnings Yield 4.56% 6.91% 5.63% 6.21% 5.66% Statistics as at 30th June 2008
Dividend Yield 4.40% 5.75% 4.94% 4.87% 2.77%
Price to Earnings Ratio 18.1 15.4 21.2 16.1 17.7 Consecutive Div. Rise 3 Years
1st Interim Dividend Per Share (Kes) 2.20 2.20 2.20 2.50 2.50 Total Return-12 Mnths 12%
2nd Interim Dividend Per Share (Kes) 2.20 2.20 2.20 2.50 2.50 Total Return-3 Years 66%
Final Dividend Per Share (Kes) 2.10 3.10 4.10 5.00 Total Return-5 Years 157%

BRITISH AMERICAN TOBACCO: PRICE CHANGE (Sept 08–Jan 09) TRADING HIGHLIGHTS
Source: NSE Pricelist, CCS Financial Solutions, www.bateac.com

Molensteegh Invest B.V. 60.00%
Div Value 4.50
Div Type Interim
Barclays (K) Nominees A/C 9296 2.12%
Old Mutual Insurance Company 0.88% Cum Div 21-Jul-08
Other Shareholders 23.76% Ex Div 15-Aug-08
The counter has been the maverick within the paycheck portfolio and sets its
own trends. Its dividend payment was paid long before the last quarter of
2008 started; however, it was the absence of the 2nd interim dividend that
sent signals that the previously aggressive dividend policy could not be
sustained. BAT Kenya had paid worth over Ksh1.5 b ($22 m) in just 5 months
which had probably taken its toll on the cashflows. Source: Company Reports, NSE Pricelists
Company Prospects
Key Share Information
The company consistently receives negative press from both media and lobby Sector Tobacco
groups on account of the nature of the product. Government has persistently Latest Share Price Kes 135.00
attacked BAT through excise duty increases, changes in by laws, Tobacco 52 Week Low – High 128 - 180
legislation that affects packaging, branding & marketing. Although the legis- Market Capitalization Kes 14 bn
lation was welcomed by BAT it may have adverse effects on operating costs. Shares Issued 100 mn
Demand for their products locally is still inelastic and covers both upper and Foreign Shareholding 61.05%
lower end market. They enjoy a large market share and the Kenyan lifestyle Book Value/Share Kes 44.33
encourages consumption. BAT has superior free cashflows (most of which are Market (P/E) 13.94
distributed through dividends). Through other BAT companies in the region Industrial (P/E) 13.09
they are able to acquire raw materials, distribute and market their products.
Company (P/E) 9.74
Contract manufacturing has opened more export opportunities and improved
Price/Book 3.05
their profile internationally (the dollar exchange rate moved in their favour
Free Float 23.80%
during the second half of 2008). They have the best credit ratings in Kenya
Support (Buy) Kes 125.00
and access to a Sh2b ($29m) unsecured borrowing facility. Primary motive for
buying BAT shares for most investors is the dividend, which are high yielding Resistance (Sell) Kes 160.00
due to the stable share price. Since 2002 BAT has paid $110m in dividends. 2007 EPS 13.86
2008 DPS 17.00
Key Dividend Statistics in Kenya Shillings (Exchange Rate ‐ US$ 1 = Kes 79.7567 )
HY 2008 Earnings (%) Up 5%
Year Ended 31st December 2004 2005 2006 2007 HY 2008 Statistics as at 30th June 2008
Earnings Yield 5.08% 6.84% 5.99% 8.24% 10.33% Div. Yield 5 yr Avg. 7.45%
Dividend Yield 6.93% 6.19% 5.99% 10.13% 2.94% Div. Growth 5 yr Avg. 17%
Price to Earnings Ratio 19.7 14.6 16.7 12.1 9.7 Consecutive Div. Rise 1 Year
Total Return-12 Mnths -2%
1st Interim Dividend Per Share (Kes) 4.50 4.50 4.50 4.50 4.50
Total Return-3 Years -11%
Interim Dividends Per Share (Kes) 7.50 3.50 ‐ 2.00
Total Return-5 Years 134%
Final Dividend Per Share (Kes) 4.50 4.50 7.50 10.50

NATION MEDIA GROUP: SHARE MOVEMENTS (Sept 08 – Jan 09) TRADING HIGHLIGHTS
Source: NSE Pricelist, CCSfs Research, www.nation.co.ke

Aga Khan Fund for Econ. Dev. 44.73%
Div Value 1.50
Mr Amin Nanji Juma 8.17%
Div Type Interim
Nima Investments 1.83% Cum Div 20-Aug-08
Other Shareholders 41.04% Ex Div 29-Aug-08
After the ex div date for interim dividend the share plummeted roughly Ksh40
or 25% and has displayed quite a large amount volatility compared to its
counterparts in the paycheck portfolio. The share has exhibited large price
spread of up to Ksh15 to Ksh20 during a trading period and trades at a high
P/E of 18.85x. Following the share split it was expected that volumes would
rise, however, volumes became thinner as the year end closed in.
Company Prospects Key Share Information

The holding company runs a network of subsidiaries that have their hands Sector Publishing
dipped in all sorts of media related activities and is estimated to control over Latest Share Price Kes 144.00
70% of the print media market share. The company’s operations are not 52 Week Low – High 100 – 197
heavily geared and the company’s capital expenditure commitments aren’t Market Capitalization Kes 21 bn
very high. Of particular emphasis this year will be the ability to go digital Shares Issued 143 mn
through online publications. NMG had launched “a Digital Division that will Foreign Shareholding 44.73%
utilize content from the print, television and radio divisions for the digital Book Value/Share Kes 26.20
platform. This would then be repackaged to make it available to a wider Market (P/E) 13.94
audience on the internet and via mobile phones” (Source: 2007 Annual Commercial (P/E) 10.39
Report). One of the key cost components has been the inventory expensed; Company (P/E) 18.85
but, good investment in technology should mitigate this. In times when the Price/Book 5.50
company has made profits the dividend policy has been adjusted to introduce Free Float 45.27%
special dividends, which means that future earnings growth may play a role Support (Buy) Kes 130.00
in the payout ratio. Since 2002 NMG has paid $40m in dividends & the market Resistance (Sell) Kes 160.00
cap. has grown from $72m to $343m-Final dividend has grown by 19% per yr. 2007 EPS 7.64
Year Ended 31st December 2004 2005 2006 2007 HY 2008 HY 2008 Earnings (%) Up 10.6%
Statistics as at 30th June 2008
Earnings Yield 6.64% 6.33% 4.37% 4.78% 4.18%
Dividend Yield 3.32% 3.78% 4.77% 3.29% 0.89% Div. Growth 5 yr Avg. 76%
Price to Earnings Ratio 15.1 15.8 22.9 20.9 23.9 Consecutive Div. Rise 3 Years
Interim Dividend Per Share (Kes) 0.38 0.50 1.00 1.50 1.50 Total Return-12 Mnths 40%
Special Dividend Per Share (Kes) ‐ ‐ 2.50 ‐ Total Return-3 Years 77%
Total Return-5 Years 364%
Final Dividend Per Share (Kes) 1.88 2.50 2.50 3.75

TOTAL KENYA: SHARE MOVEMENTS (Sep 08 – Jan 09) TRADING HIGHLIGHTS
Total Kenya: Bollinger Bands and Relative Strength Index (September 2008 – January 2009)
Key Share Information
Sector Oil & Gas

Latest Share Price Kes 33.00
52 Week Low – High 24.0 – 35.5
Market Capitalization Kes 5.8 bn
Shares Issued 175 mn
Foreign Shareholding 78.29%
Book Value/Share Kes 26.13
Source: NSE Pricelist, CCS Financial Solutions, www.total.co.ke Market (P/E) 13.94
Total has been sending buy signals the past week as shown above ahead of its Industrial (P/E) 13.09
march earnings announcement where it is expected to surpass 2007 earnings Company (P/E) 11.04
by 80%. Assuming that the 2008 div. policy is maintained at current prices it Price/Book 1.26
would yield 7%. However, the 2009 financial year will be hard for the oil Free Float 21.71%
marketer as its general trade (that includes LPG & supply of furnace oil) and Support (Buy) Kes 28.00
the aviation businesses are expected to suffer. Its lucrative contract with Resistance (Sell) Kes 35.00
Triton Petroleum to supply KenGen’s EPPs generators is also sticky. Total has 2007 EPS 2.99
no long debt & capex spend may not affect payout; a proposal by Total Outre 2008 DPS 2.50
Mer (with a 72% stake) to buy Caltex may see dividend rise, used as financing HY 2008 Earnings (%) Up 114%
Key Dividend Statistics in Kenya Shillings (Exchange Rate ‐ US$ 1 = Kes 79.7567 ) Statistics as at 30th June 2008
Year Ended 31st December 2004 2005 2006 2007 HY 2008 Div. Yield 5 yr Avg. 6.73%
Earnings Yield 8.71% 7.74% 7.33% 8.74% 21.46%
Dividend Yield 6.61% 6.37% 6.60% 7.30% Total Return-12 Mnths 7%
Price to Earnings Ratio 11.5 12.9 13.6 11.4 4.7 Total Return-3 Years -19%
Final Dividend Per Share (Kes) 2.50 2.50 2.50 2.50 Total Return-5 Years 57%

References
Mayo, H. (2003). Investments: An Introduction. Singapore: Thomson South-Western, page 453
Kimura, J. H. (1992). Final Report on the Revision of the NSE Index. Study commissioned by the Nairobi Stock
Exchange, Nairobi, Kenya, pages 11 - 12
Ngugi, R. (2003). Development of the Nairobi Stock Exchange: A Historical Perspective (KIPPRA Discussion
Paper No.27). Nairobi, Kenya: Kenya Institute for Public Policy Research and Analysis, Macroeconomics Division,
Retrieved on January 2, 2009 from http://www.kippra.org
Ngugi, R. & Njiru. R. (2005). Growth of the Nairobi Stock Exchange Primary Market (KIPPRA Discussion Paper
No.47). Nairobi, Kenya: Kenya Institute for Public Policy Research and Analysis, Private Sector Development
Division, Retrieved on January 2, 2009 from http://www.kippra.org
Tweedy, Browne Worldwide High Dividend Yield Value Fund. (2007). The High Dividend Yield Return
Advantage: An Examination of Empirical Data Associating Investment in High Dividend Yield Securities with
Attractive Returns Over Long Measurement Periods. New York: Tweedy, Browne Fund Inc, pages 2 – 15,
Retrieved August 1, 2008, from http://www.tweedy.com/research/papers_speeches.php
Tweedy, Browne Fund Inc. (2008). 2008 Final Dividend and Capital Gain Distributions. New York: Tweedy,
Browne Fund Inc, page 1, Retrieved January 12, 2009, from
http://www.tweedy.com/research/papers_speeches.php
Knapp, D. V. (2008). The Reasons Why Dividend Stocks Make Great Investments. Retrieved January 15, 2009,
from http://www.sap-basis-abap.com/shares/why-dividend-stocks-make-great-investments.htm
Stockcharts.com (2008). Technical Indicators: Bollinger Bands. Retrieved January 14, 2009, from
http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:bollinger_bands
Wikipedia.org (2008). Dividend. Retrieved January 15, 2009 from http://en.wikipedia.org/wiki/Dividend
Investopedia Staff. (2008). Coefficient Of Variation - CV. Retrieved on January 14, 2009, from
http://www.investopedia.com/terms/c/coefficientofvariation.asp
Investopedia Staff. (2008). The Perks of Dividend Reinvestment Plans. Retrieved on August 1, 2008, from
http://www.investopedia.com/articles/02/011602.asp
Disclaimer and Confidentiality

This document is issued for the information of clients of CCS Financial Solutions Ltd. It is subject to copyright and may not be reproduced in whole or in
part without written permission. The information, opinions and recommendations contained herein are and must be construed solely as statements of
opinion and not statements of fact. No warranty, expressed or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any
particular purpose of any such recommendation or information is given or made by CCS Financial Solutions Ltd in any form or manner whatsoever. CCS
Financial Solutions Ltd will accept no responsibility of whatsoever nature in respect of any statement, opinion, recommendation or information
contained in this document.
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2nd Floor, Ojijo Plaza

P.O. Box 49243, 00100

Perking Up Your Dividend Returns 19th January 2009

CONTACTS Table of contents

Investment Advisory Introduction to Dividend Research…………………………………….…….1

Research and Analysis

OUR SERVICES: THEME II: EQUITY INCOME FUNDS

CCS Financial Solutions Ltd , Modeling a Portfolio ……………………………………………………..13

Financial Planning APPENDIX

Timeline of key policy changes affecting dividends or returns at the NSE

Long Term Returns and Inflation

*Average annual Inflation figure for 2008 relates to November 2008

Source: Central Bank of Kenya

Apart from the inflation risk

Source: CCSfs estimates

Source: CCSfs, NSE

Source: CCSfs, NSE

Source: CCSfs, NSE

Source: CCSfs, NSE

Source: JSE Source: Dar es Salaam Stock Exchange (DSE)

o We discovered that dividend reinvestment is a useful strategy in growing capital and

Introduction to the NSE main market Index

Composition of the High Dividend Yield Tiers (on page 6)

Year Company Type Ratio Price Books Closure

Composition of the AIG (East Africa) 27 Index

Agriculture Sector Commercial Sector Financial Sector Industrial Sector

Source: AIG Investment Kenya

Source: NSE Pricelist, CCS Financial Solutions, www.eabl.com

- 19 - CCSfs Research – www.ccsfinancialsolutions.com

Source: NSE Pricelist, CCS Financial Solutions, www.bamburicement.com

- 20 - CCSfs Research – www.ccsfinancialsolutions.com

Source: NSE Pricelist, CCS Financial Solutions, www.standardchartered.com/ke

- 21 - CCSfs Research – www.ccsfinancialsolutions.com

Source: NSE Pricelist, CCS Financial Solutions, www.bateac.com

- 22 - CCSfs Research – www.ccsfinancialsolutions.com

Source: NSE Pricelist, CCSfs Research, www.nation.co.ke

Company Prospects Key Share Information

- 23 - CCSfs Research – www.ccsfinancialsolutions.com

Source: Company Reports, NSE Pricelists

Key Share Information

Sector Oil & Gas

- 24 - CCSfs Research – www.ccsfinancialsolutions.com

Mayo, H. (2003). Investments: An Introduction. Singapore: Thomson South-Western, page 453

Wikipedia.org (2008). Dividend. Retrieved January 15, 2009 from http://en.wikipedia.org/wiki/Dividend

Disclaimer and Confidentiality

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