THE USE, UGANDA’S OPEN SECRET

If you are to get a quick idea of a person’s financial health, look at how they spend their money.

There are only two ways to spend your money, either you consume/eat it or you invest it. Consumption needs no definition, but investing means committing money with the hope of a return in the future. The returns on investment can come as cash-on-cash returns – you earn cash from the investment or as capital gains – you invest in something and its price rises after you have invested.

Going by this, your financial health is dictated by the balance of how you spend your money. If you consume more than you invest you are not very healthy financially and the opposite is true. Essentially

your financial health is determined by how much of how much you earn you keep.

Shifting the balance is a process done over time and often begins with a shift in mindset, unless you are forced to save like many workers do with the National Social Security Fund (NSSF) in Uganda.

But many of us are at loss on what to invest in. As a result of this confusion, we follow the bandwagon into farming, real estate or business. For those who can not muster the monies to go into the above, they fall back on eating their kamoney, until they get a “big deal”.

Is it any wonder that corruption is in our DNA?  In our endevour to hasten the big deal we end up dipping our fingers in the till.

For the everyday man there is a way to sock away small sums, which over time can grow into huge investments.

The answer is the Uganda Securities Exchange (USE).

At the USE for as little as sh10,000 – National Insurance Corporation (NIC) shares are selling for sh6.5, one can begin on their investment journey, while they wait for the big deal.

They say the best time to start investing was 20 years ago and the next best time is now...

But don’t take my word for it.

If you invested sh10,000 in each of the 11 locally listed shares on 2 January last year, by year end you would have registered a return of sh4,400 according to share monitoring firm Simply Wallstreet. This was in dividends – a share of company profits,  and share price increases (capital gains).

While that may not be enough to whet your appetite, the devil is in the detail.

Of the 11 companies listed on the USE, all but three showed a positive return last year.

Of the eight winners, five of them showed double digit returns, with the lowest being Bank of Baroda at about 19 percent by the end of November and the highest being Stanbic Bank at about 73 percent, according to investment bankers Crested Capital. And among these winners, three of them their dividends accounted for between 25 and 50 percent of the gains.

Interestingly for two counters – MTN and Uganda Clays despite a slide in prices, the dividend payouts more than compensated for that to show a positive total return at year end.

Basically, that you can still win on the exchange even if the share prices dip, if the company is fundamentally sound and can afford a dividend payout...

In an ideal world if a company is doing well – revenues, profits and net asset value are growing, the share prices should follow suit. It doesn’t always work that way especially on the USE where trading is very thin – up to November turnover was only sh61b, with one counter Umeme accounting for almost half of this volume.

Trading is thin because most shares are held by institutional investors, who often buy to hold rather than trade. As a result price movements across the market are subdued.

So, while you can get some credible dividend yields – how much dividend you get compared to what you paid, the history of the USE is that it is rather sleepy in terms of price movements.

But there in lies a huge opportunity for long term players. If company profitability continues to grow while prices are indifferent, it means the shares are becoming increasingly good value for money.

Imagine you bought your house at sh100m ten years ago and were initially charging one million shillings a month in rent but ten years later rent has doubled to sh2m, the value of your house has gone up, at least twice, beyond the initial sh100m you bought it at. Even if no one knows until you decide to sell.

Before telecom company Airtel started trading at the end of the year, while profitability of the listed companies was up 24 percent, prices on average had only moved up  6 percent. Meaning prices had some way to catch up to earnings.

It is a no brainer. As long as companies’ earnings continue to outstrip price movements, it’s a mathematical certainty that somewhere down the line prices will begin to rise to reflect this reality. Next week? Next month? Nest year? Who knows but it will.

Historically the best returns for your money come from owning businesses. The USE is offering pieces of some of the best run companies in Uganda and the region – there are seven Kenyan companies selling shares on the USE, for a few shillings.

And we have not even talked about the treasury bonds and bills trading on the exchange with double digit returns.

So why isn’t the above not widely known? Wealth is silent.