Re: Please Advise Bosun
Last week I narrated the story of Bosun and his over 1 million units of NB shares valued at about N170 million. The advice I will give Bosun is to sell his NB shares and diversify his investment.
I think NB shares are overvalued based on the previous and current earnings and growth potentials of the earnings. If we use the half year result as the basis of our analysis, the company will make an earning per share of about N5.40 at the end of 2013.
That means 1 million shares of the company valued at almost N170 million will earn just N5.4 million and may be a dividend of N3.5 million, less withholding tax of 10% giving us a dividend of N3.15 million. An investor can get better returns from other stocks, money market investment and real estate.
Most corporate executives are emotionally attached to the shares of their companies; therefore they are always reluctant to sell their company’s shares when the need arises. I think Bosun is in similar boat. Our investment decisions should be determined by economic realities and rational analyses rather than emotional attachment.
If I were Bosun, I will sell 90% of my NB shares and raise about N150 million and will be left with just 100,000 units of NB shares.
The N150 million that was realized from the sale of the 90% of my NB shares will now be diversified by investing N40 million in real estate that will generate about N3 million as rental income. Another N10 million will be invested in acres of land at either Agbara/Igbesa, Mowe/Ibafo or Epe axis. The acres will be divided into plots and resold for a profit margin of 20% to 25%.
N10 million will be invested in treasury bills and another N10 million will be used in setting up a company. The company will supply raw materials and commodities like maize, millet, barley, sorghum etc to companies in the brewery industry. My experience in the procurement department in a brewery company will come to play in this venture. The company will be managed by a trusted partner.
The remaining N80 million naira will be invested in good undervalued companies that have good products and management in place, growing their earnings by a minimum of 10% per year and are currently selling at a PE of less than 10. These stocks will give a dividend of about N5 million per year and a very good probability of increasing the dividends as the earnings increase.
The blue-chip shares will now be used as collateral to get a loan of about N40 million for real estate investment, rental income, dividends, interest and profits from my business will liquidate this loan in 3 years, this loan cycle will continue for about 10 years. In 10 years time, I should have added 3 income generating house to my real estate portfolio.
This strategy would have increased Bosun’s net-worth by a conservative estimate of N150 million. We know that Bosun’s net-worth is about N210 million, his investment in NB represents about 80% of his net-worth. Assuming this strategy gives a very conservative return of 10%, his current net-worth of N210 million would have grown to N544 million in 10 years, if we add this to his real-estate portfolio Bosun will have a net-worth of about N700 million in 10 years. By this time he would have spent 30 years in the company and will be getting ready for retirement.
Bosun’s investment in real estate, stocks, business and money market instrument can comfortably give him an annual income of over N30 million.
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Lessons that can be learnt from Bosun.
- He invested in his career.
- He made good use of opportunities.
- He practiced delayed gratification.
- He imbibed the values inculcated in him by his parents.
- He paid himself first.
- He used his earnings to create residual income.
- Bosun is an employee, but did not rely solely on his employer to take care of him at retirement. Bosun is more than a level ahead of his colleagues and contemporaries.
- With the right mindset and God on our side we can succeed in Nigeria.
