Imagine you run a small shop. Sales look great on paper, and profits seem strong after covering your expenses. You’re thrilled, so you decide to reward yourself with a hefty ‘dividend’. But when you open the cash till, reality hits: there’s far less money than expected. Customers have bought on credit but haven’t paid. Unexpected repairs have drained your funds. Now, you can’t pay suppliers, and lenders are demanding repayment. This mirrors what happened at Geregu Power-and offers crucial lessons for anyone investing in the stock market.
What exactly is a default?
A default means a company (or a person) fails to pay money it legally owes on time. In Geregu’s case, the company had borrowed ?40 billion from investors through a bond. The agreement said it must pay interest (the coupon) and part of the principal on set dates. When the due date arrived in 2026, the company did not make those payments. That is a default. Default is serious.
‘Cash earned (especially free cash flow) is the actual money that ends up in the company’s bank account after it has paid for its day-to-day running costs and the money needed to keep operations running. Cash is harder to invent. Either the money is there, or it is not.’
Who gets paid first when a company defaults?
This is one of the most important rules in finance, and it is the same whether the company is big or small. When a company cannot pay everyone, the law sets a clear order of priority called the capital structure or the priority of claims. As a shareholder, you are at the bottom of the ladder. That is why buying shares is riskier than buying a bond issued by the same company. You enjoy the upside when things go well, but you absorb the first losses when things go badly.
Sales, profit and cash – Three very different things
Many new investors fixate on just two numbers: sales and profit. When these climb, it’s tempting to assume the company is thriving and dividends are safe. Geregu’s story exposes why this thinking can be dangerous.
Sales (revenue) is the total value of what the company has sold or billed. Sales can look excellent even if customers have not yet paid. Net profit is the accounting profit left after deducting all costs, interest, depreciation and tax. Accountants use rules that sometimes allow companies to record income before the cash arrives or to spread big expenses over many years. Profit can therefore be managed or ‘smoothed’. It is useful, but it is not the same as money in the bank. Cash earned (especially free cash flow) is the actual money that ends up in the company’s bank account after it has paid for its day-to-day running costs and the money needed to keep operations running. Cash is harder to invent. Either the money is there, or it is not.
Think of it like your personal finances. Your salary (sales) may be high. After deducting tax and estimated expenses, you may calculate that you have a good ‘profit’ left. But if half your clients pay late, and you just spent a lot fixing your car, the cash in your account may be low. You cannot pay your own rent with paper profit.
The dividend question every investor must ask
A dividend is simply the company sharing some of its cash with the owners. It feels good to receive it. But the critical question is: can the company truly afford it? If a company pays dividends bigger than the cash it is actually generating, it is doing one of three things: using up its cash savings, delaying payments to its own suppliers, or borrowing more money.
None of these is healthy for long. It is similar to a person who keeps taking money out of a savings account or using a credit card to fund a lifestyle that their actual salary cannot support. Eventually, the cash runs out. In Nigeria, we have seen the Central Bank stop some banks from paying dividends when those banks were under financial pressure. The reason was simple: protect the institution first, pay shareholders later. The same logic applies to any company. When cash is tight, the prudent action is to conserve money, not to hand it out.
What ordinary investors should watch for
You do not need to be an accountant to protect yourself. Here are practical things to look at:
Compare the dividend to free cash flow, not just to profit. If the dividend is regularly higher than free cash flow, be careful.
Watch the trend in cash balances and receivables (money customers owe the company). Rising receivables while cash is falling is a warning sign.
Check whether the company is paying its lenders and suppliers on time. A missed bond payment or reports of stretched payables are serious red flags.
Look at how much of the company’s shares are freely traded (the free float). When only a small percentage of shares are available to the public, the price can stay high for a long time even when the underlying story is deteriorating, because few shares change hands.
Ask yourself: if this company stopped paying dividends tomorrow, would I still be happy to own the shares based on the strength of the business itself?
Owning shares makes you a real business partner. But only real cash-not paper profits-can keep a company alive, pay its debts, and ultimately reward you.
Cash is the oxygen that sustains a business. Paying big dividends while cash flow is weak only piles on risk. Whether you’re a new investor or an old hand, train yourself to look beyond the headline numbers. Focus on the cash the company actually brings in and pays out. This habit won’t eliminate all risk, but it will save you from many costly surprises.