Buying low-priced stocks: The benefits we underrate

low-priced stocks

Basically, listed companies on the stock market can be placed under two categories in terms of their share prices. On one side, there is the category of stocks that trade at comparatively high price per share. On the other side, there is another category that fairly trade at low price per share. One deliberation when it comes to stock trading is the decision on whether to purchase low-priced stocks or high-priced stocks. A few investors argue that buying low-priced stocks comes with many benefits. For instance, Warren Buffett, a veteran investor, argues that:

The key to successful investing is to buy low, [and] sell high.

Low-priced stocks may however not be necessarily cheap. In other words, it is important to look beyond the mere cheap price of a stock. This is because a number of factors can contribute to how high or low a stock price can be. For example, during stock split (when an institution decides to divide its existing shares into multiples), the price per each of the divided shares reduces by default while their values remain unchanged. When the shares of an institution become undervalued, it can also lead to a low-priced stock. Undervalued stocks are stocks that are sold at prices presumed to be below their true intrinsic value.

Due to the above contributing factors, using only the market price of a stock to determine its worth may be sometimes deceptive. In fact, some stocks may not be even worth the low price being paid for. For instance, cheap stocks that post fewer earnings may turn out to be costly if their price-to-earnings (P/E) ratio is high. Note that in general, the higher the P/E ratio, the more expensive the stock. The Ghana Stock Exchange publishes P/E ratios of the various listed stocks on its website. Recognising the underlying (or intrinsic) value of a stock when making decision on low-priced stocks would be useful.

Now, before we begin to list some of the benefits of buying low-priced stocks, we should bear in mind that buying low-priced stocks may also come with some downsides. In the meantime, let’s focus on their upsides.

 

  1. Lower initial investment

Low-priced stocks offer investors the opportunity to start with minimal amounts. This is particularly beneficial for low income earners as well as new investors who may not have that much to begin with. Besides, it makes it easier for one to invest as much of his investible money as possible. Remember that shares are bought in wholes, not in fractions. For instance, you cannot purchase 2.5 shares of a company’s stocks. Neither can you purchase 2.99 units of shares from the stock market- You are allowed to purchase in whole numbers such as 2 shares, 3 shares, etc. Let’s assume that you have only GH¢50 at your disposal to purchase some stocks on the GSE. With this amount, you can only afford one share of AGA (AngloGold Ashanti Limited) which is currently traded at GH¢37 per share. Thus, the remaining GH¢13 may be left idly. Meanwhile, the same GH¢50 could purchase 55 shares of CAL bank stocks (currently traded at GH¢0.9 per share), leaving just GH¢0.5 unused. In effect, low-priced stocks can offer maximum utilisation of one’s investment.

 

  1. High potential for growth

Low-priced stocks, in particular, undervalued stocks, appear to have greater potential for growth. In general, it is likely for the share price of a low-priced stock to rise steeply if the company comes out with something favourable. This places its shareholders in good position to make some gains. With any slightest increase in share price, investors owning more stocks stand a greater chance to increase their returns. For example, an investor with GH¢500 can purchase 10,000 shares of a stock priced at GH¢0.05 If the share price of this stock increases by 0.01 to GH¢0.06, the investor’s stock value would be GH¢600 (that is, 10000×0.06). This would be 20% appreciation from the original purchase price. In comparison, if an investor use the same GH¢500 to purchase 100 shares of a stock priced at GH¢5, he may not achieve similar results when the price of the stock appreciates by 0.01. In this instance, the value of the investor’s stocks would be GH¢501 (that is, 100×5.01), representing just a 0.2% appreciation.

It may also be important to note that not all low-priced stocks have the potential to appreciate exponentially at a given time. Moreover, the price movement of a few low-priced stocks tend to be erratic and risky. A typical example is CPC (Cocoa Processing Company) stock, known to be one of the low-priced stocks on the Ghana Stock Exchange. In fact, the share price of CPC can increase or drop by 50% within a particular trading day. Over the past five years, CPC stock (currently priced at GH¢0.02/share) has periodically enjoyed substantial [±50%] price movements within some particular years. Notwithstanding these significant movements, the opening and closing prices of CPC stock have remained unchanged in each of the individual years (since 2011). In effect, in terms of annual returns, CPC stock has recorded 0% from 2011 to 2016.

  1. The potential for high dividend earnings

Dividends are paid on each share held by a shareholder. This means that the higher the number of shares owned, the higher the earnings derived from dividends. All things being equal, as stock prices fall, they become cheaper to buy. Thus, you get the chance to buy an investment at a bargain rate. Low-priced stocks offer you the advantage of acquiring increased number of shares at the same monetary value. Let’s have a look at the example below:

Two investors, Gadasu and Ashai, both had GH¢1,000 at their disposal to purchase some stocks on the Ghana Stock Exchange. They both settled on purchasing shares of Societe Generale Ghana Limited (SOGEGH). However, Gadasu completed his purchase on 31st December 2014 while Ashai bought his shares two years later, on 30th December 2016. The price per share of SOGEGH on 31st December 2014 and 30th December 2016 was GH¢1 and GH¢0.62 respectively. Hence, with the GH¢1000, Gadasu possessed 1000 shares while Ashai owned 1612 shares of SOGEGH.

Now, in May 2017, Societe Generale paid a dividend of GH¢0.033/share to each qualified shareholder.  Gadasu and Ashai therefore earned GH¢33 and GH¢53.2 respectively from the dividend pay-outs.

It can be deduced from the above example that the low price of SOGEGH stock in 2016 gave Ashai the advantage to acquire more number of shares compared to what Gadasu attained in 2014. Ashai’s increased number of shares therefore made him earn more in dividends than Gadasu even though they equally invested GH¢1000. Unfortunately, not all companies follow a regular pattern of dividend payments. Furthermore, the dividend yield of many stocks may be considered too low. Thus, the advantage of earning more dividends from low-priced stocks may not be practical for all stocks.

 

  1. Improved diversification

Diversification continues to be a common term in the investment world due to the associated positive outcomes. Earlier in this post, it was mentioned that low-priced stocks make it affordable for investors to start with minimal amounts of money. The affordability factor allows investors to be able to invest a small amount of money in a diversified portfolio. Now, imagine a low-income earner who wish to invest GH¢50 in a diversified stock portfolio. If this investor selects Anglogold Ashanti (AGA) as one of his stock picks, he may end up spending almost all his GH¢50 on just a single share of AGA since one share of AGA is priced at about GH¢37. On the other hand, the investor may be able to purchase a mix of stocks comprising CAL bank (currently priced at about GH¢0.9), SOGEGH (currently priced at GH¢0.75) and probably GOIL (currently priced at GH¢2.29). For example, out of the GH¢50, he could spend GH¢20 on 22 CAL shares, GH¢10 on 13 shares of SOGEGH and GH¢20 on 8 shares of GOIL. This therefore gives the investor the opportunity to reap many of the benefits associated with investment diversification.



Dividend payments of selected stocks on the Ghana Stock Exchange

dividend payments

Honestly, there is one particular sentence I always love to come across in the annual reports of listed companies. It goes like:

The directors have recommended a dividend of GH¢… for the year ended…

As some of you may be already aware, a number of listed companies distribute portions of their earned profits to their shareholders on a regular basis. This payment, referred to as dividend, is one of the benefits of investing in stocks. Although dividend payments are often made in cash, they may also be distributed in the form of bonus shares (free additional shares to existing shareholders) or a combination of both. For instance, a company may issue bonus shares in the ratio of 1 share per 10 existing shares held by its shareholders.

Many listed companies pay dividends to their shareholders once annually. A few of them however pay dividends twice per annum, which are made up of interim and final dividends. TOTAL Petroleum, Tullow Oil and Mechanical Lloyd are examples of the few ones that usually pay dividends twice in a year. It should however be noted that even though some companies pay dividends twice in a year, the sum of their two dividend figures might not match the single dividends paid by other companies.

While some institutions prefer to issue cheques as payment medium of their dividends, others deposit them directly into shareholders’ bank accounts. CAL bank, UT bank and Tullow Oil are typical examples of companies that deposit dividends directly into their shareholders’ bank accounts.

It may also not be appropriate to compare the dividend figures of two different stocks, particularly if they are of different industrial sectors. A more appropriate way to determine which stocks pay more as dividend could be the use of dividend yields. Dividend yield is the dividend expressed as a percentage of the stock price. This normally ranges from 4% to 9% depending on the company’s dividend policy and other factors such as a sharp decline in stock prices.

Simply, Dividend yield = Dividend per share/price per share.

Although dividend payments remain one of the factors looked for by some investors during stocks purchase, they should not necessarily be the yardstick to determine whether a stock is good or bad. This is because even though a company may make massive profits, it may choose to invest most of the profits in expansion projects instead of giving them to its shareholders as dividends. Nonetheless, dividends can still serve a useful purpose for investors who seek regular income.

Infact, dividend payments as well as an increase in dividend payment rates cannot be guaranteed. For example, Enterprise Group Limited, which is known for consistently paying dividends to its shareholders, skipped issuing dividend for its 2011 financial year. Likewise, GGBL (Guinness Ghana Breweries Limited) paid no dividend to its shareholders from 2010 to 2012. Moreover, Camelot Ghana Limited paid a constant dividend of GH¢ 0.005 for four consecutive financial years (2008 to 2011) without increasing the rate.

On the other hand, Goil (Ghana Oil Company Limited), which listed on the GSE in November 2007, has consistently paid dividends to its shareholders in an increasing rate to date.

Without bombarding you with further dividend theory, let me tabulate below, the dividend payments of 10 selected stocks for the past decade.

See also: A snapshot of Ghana Stock Exchange performance in 2016



1. Dividend payments of CAL Bank Limited (CAL)

Financial Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Dividend, GH¢ 0.0075 0.0075 0.0075 0.0105 0.0145 0.012 0.013 0.026 0.035 0.053 0.081 0.1

2. Dividend payments of Guinness Ghana Breweries Limited (GGBL)

Financial Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Dividend, GH¢ 0.03 0.0361 0.0418 0.0429 0.0485 0.04 Nil Nil Nil 0.01729 Nil Nil

3. Dividend payments of Ghana Commercial Bank (GCB)

Financial Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Dividend, GH¢ 0.0375 0.04 0.055 0.055 0.060 0.06 0.07 0.14 0.18 0.25 0.32 0.33

4. Dividend payments of Ecobank Ghana Limited (EGH)

Financial Year 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Dividend, GH¢ 0.067 0.24 0.16 0.18 0.2 0.24 0.29 0.43 0.78 0.84

5. Dividend payments of Societe Generale Ghana Limited (SOGEGH)

Financial Year 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Dividend, GH¢ 0.045 0.045 0.03 Issued bonus shares 0.04 0.035 0.04 0.04 0.06 Issued bonus shares 0.076

6. Dividend payments of Enterprise Group Limited (EGL)

Financial Year 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Dividend, GH¢ 0.005 0.005 0.008 0.009 0.01 Nil 0.032 0.045 0.215 0.05

7. Dividend payments of Fan Milk Limited (FML)

Financial Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Dividend, GH¢ 0.03 0.04 0.046 0.0575 0.075 0.1 0.02 0.04 0.06 0.09 0.09 0.1035

8. Dividend payments of HFC Bank (Ghana) Limited (HFC)

Financial Year 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Dividend, GH¢ 0.0045 0.0055 0.01 0.01 0.015 0.016 0.022 0.028 0.035 0.06 Nil

9. Dividend payments of Ghana Oil Company Limited (GOIL)

Financial Year 2008 2009 2010 2011 2012 2013 2014 2015
Dividend, GH¢ 0.0085 0.0104 0.012 0.014 0.015 0.016 0.02 0.025

10. Dividend payments of Camelot Ghana Limited (CMLT)

Financial Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Dividend, GH¢ 0.003 0.004 0.004 0.004 0.0045 0.005 0.005 0.005 0.005 0.006 0.006 0.0075 0.0075