Dangote Cement shareholders have consistently enjoyed robust dividends, with cumulative payouts reaching N2.8 trillion by 2024.

In 2023, the company increased its dividend by 50% to N30 per share, a yield of 6.27% at the current share price of N478.80.

This increase has contributed to a year-to-date total return of 56%, driven by both dividend income and share price appreciation.

Even though the company’s dividend history is clearly positive, the question remains: does Dangote Cement’s valuation at N478 per share offer real value given its recent performance and cost pressures?

The first nine months of 2024 reveal a more challenging landscape for Dangote Cement, grappling with rising operational costs and squeezed profit margins.

Although revenues increased 69% year-on-year to N2.56 trillion, driven by resilient Nigerian demand and strategic price hikes, these gains are being held back by rising costs of fuel, electricity, interest costs and foreign exchange losses, which significantly reduced revenues. profit margins.

Revenue increased 69% year-on-year to N2.56 trillion, driven by strong demand in Nigeria and price adjustments. However, this revenue growth did not translate into a comparable increase in profits due to rising costs in key operational areas.

Operational costs have increased, putting significant pressure on margins. Fuel and electricity costs, which now constitute 44% of cost of sales, increased by 109% year-on-year.

Additionally, transportation expenses increased by 99% to N405.8 billion, or about 31% of gross profit. Together, these increases eroded profit margins despite strong revenue growth.

Rising interest costs, up 152% to N227.7 billion, halved the interest cover ratio to 3.3x from last year’s 6.6x. These peaks weigh on profitability, with operating profit increasing by only 0.37%.

Foreign exchange losses also weigh heavily on the company. Foreign exchange losses soared 124% year-on-year to N222.1 billion, representing almost 30% of operating profit. The company’s dependence on foreign inputs and equipment means that currency volatility is a critical factor, and the continued depreciation of the naira could further compound these losses.

Another area of ​​concern is Dangote Cement’s low capacity utilization. While production capacity increased slightly to 52 million tonnes, the actual production volume increased by only 1.7%, indicating a utilization rate of less than 40%. This low rate suggests underutilization of resources, which could limit future revenue growth if not corrected.

Recognizing these operational challenges, Dangote Cement CEO Arvind Pathak has outlined cost reduction and sustainability initiatives aimed at alleviating some of these pressures. The company recently introduced a fleet of 1,500 compressed natural gas (CNG) trucks, in a bid to reduce its reliance 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 are expected to drive profitability over time.

However, these projects are long-term in nature and it may take time for their full financial impact to be realized.

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 on to the shares seems a prudent option, given the company’s ability to maintain profitability and a consistent dividend history despite current cost pressures.

Although the challenges are considerable, Dangote Cement’s resilience and strong market position suggest that these headwinds may be temporary.

However, for potential investors, it may be wise to wait for clearer indications on the effectiveness of cost control and foreign exchange risk stabilization measures before launching, as this would provide a more secure basis for long-term growth.

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