November 2024 – Dangote Cement, Nigeria’s largest cement manufacturer, continues to deliver strong dividends to its shareholders, with cumulative payouts reaching an impressive N2.8 trillion by 2024. In 2023, the company raised its dividend by 50% to N30 per share, yielding a healthy 6.27% at the current share price of N478.80. This contributed to a 56% return year-to-date, driven by a combination of both dividend income and share price appreciation.
However, despite the attractive dividend history, the company’s valuation at N478 per share is facing scrutiny as it grapples with a challenging operating environment. Let’s take a closer look at the financial and operational dynamics of Dangote Cement in 2024.
2024 Performance: Strong Revenue, Squeezed Margins
Dangote Cement posted a 69% year-on-year increase in revenue for the first nine months of 2024, reaching N2.56 trillion. This was driven by strong domestic demand and strategic price increases. Despite the top-line growth, the company faces significant cost pressures, which have squeezed profit margins. Key cost areas such as fuel, power, interest expenses, and foreign exchange losses have all seen sharp increases.
- Fuel and Power Costs: These now make up 44% of the cost of sales, having increased by 109% year-on-year. This surge in energy expenses is a major challenge for Dangote Cement, which is highly dependent on power to run its production facilities.
- Haulage Costs: The cost of transportation and logistics surged by 99% to N405.8 billion, now accounting for 31% of gross profit. This, too, erodes margins despite the growth in revenue.
- Interest Costs: Rising borrowing costs pushed interest expenses up by 152% to N227.7 billion, which has reduced the company’s interest coverage ratio from 6.6x last year to 3.3x, putting additional strain on profitability.
- Foreign Exchange Losses: Dangote Cement also faced significant foreign exchange (FX) losses, which rose by 124% to N222.1 billion, representing nearly 30% of operating profit. With the company’s dependence on foreign inputs and equipment, the naira’s volatility and the ongoing depreciation of the local currency have intensified the FX burden.
Production Challenges: Low Capacity Utilization
Another concern for investors is the company’s low capacity utilization. Despite growing its production capacity slightly to 52 million tons, Dangote Cement’s actual production volume only increased by 1.7%. This implies a utilization rate of less than 40%, indicating significant underutilization of its facilities. If this trend continues, it could limit the company’s ability to capitalize on demand growth and expand revenue, especially as competition in the cement industry intensifies.
Strategic Initiatives for Cost Control and Sustainability
In response to these challenges, Arvind Pathak, Dangote Cement’s CEO, has outlined several strategic initiatives aimed at improving cost efficiency and sustainability:
- CNG Trucks: The company has introduced a fleet of 1,500 compressed natural gas (CNG) trucks to reduce reliance on more expensive and polluting diesel vehicles. This shift is expected to provide long-term cost savings, but its impact will take time to materialize.
- Alternative Fuel Projects: Dangote Cement has already launched 11 of 17 planned alternative fuel projects, which aim to diversify its energy sources and reduce reliance on costly fossil fuels. These initiatives align with the company’s sustainability goals and should contribute to cost efficiency in the medium-to-long term.
Market Sentiment and Investor Outlook
While the company’s dividend history and market position remain strong, the rising costs and profit margin compression have had an impact on investor sentiment. Dangote Cement’s market capitalization, which peaked at N11.4 trillion in the first half of 2024, has since declined to N8.2 trillion as of November 14, 2024.
For existing shareholders, holding onto the stock could still be a prudent option, especially considering the company’s ability to maintain profitability and its consistent track record of dividend payouts despite current operational challenges. The 56% total return in 2024 highlights the ongoing investor confidence, despite the pressures on margins.
However, for prospective investors, it may be wise to take a cautious approach and wait for clearer signs of cost control success and stabilization in foreign exchange risks before making a move. Successful implementation of cost-cutting measures and the stabilization of energy and FX costs could provide a more secure foundation for long-term growth.
Dangote Cement remains a dominant player in Nigeria’s cement industry, and its robust dividend history continues to make it an attractive option for income-focused investors. However, the challenges of rising fuel, haulage, and foreign exchange costs, coupled with low capacity utilization, highlight the risks of investing in the company at its current valuation.
Investors looking for growth may want to see how the company addresses its operational challenges and whether its cost-cutting initiatives deliver tangible results before considering new investments. For those holding the stock, the strong dividend payouts and market leadership suggest that patience could reward them in the long term, despite the current economic headwinds.
