Majority of ANZ companies are value destroyers

[winner69]

From well respected Aswath Damodaran this is interesting. You’d be surprised which NZ companies don’t generate excess returns ...ie Value destroyers (not creators)

Aswath says - To create value, a firm has to generate a return on its capital that is higher than its cost of capital.

He’s analysed companies across the globe and concluded that value destruction was more rule than exception. His report shows 67% of ANZ have a ROIC less than its cost of capital....from table below

Interesting eh ..but most would say a load of the old proverbial.

http://aswathdamodaran.blogspot.com/2019/01/january-2019-data-update-6.html

[Scrunch]

A lot of analysis went into the underlying calculations, but at the end of the day it didn't seem to say anything other than returns don't come equally from all your investments.

Lets assume you start with $100k and put it into 10 companies looking for a 10% return. Over the next year one share doubles, one goes up by 50%, 6 have a 5% return and one goes down by 20% and one declines by 50%. Should you be happy? - yes because you have just had an 11% return exceeding your 10% target. How many exceeded their WACC (assuming this was 10%), only 2 of 10 have done that.

This sort of return pattern with a few big winners will generate the results above. The problem is what will be the big winners is hard, and some would say impossible, to spot in advance. If you did it reliably, 20%+ pa returns are available.

[Biscuit]

Take home message perhaps: quality companies producing "value" are scarce and likely over-valued at any time, you are more likely to make money trading out of favour companies than buying and holding companies you think are quality.

[Beagle]

I agree that there are very few quality companies out there that truly look after shareholder interests and give a satisfactory ROIC.
Many managers at all level's of organisations are purely acting in their own interests with little or no regard for the shareholders who put up their risk capital that is employing them.

[blackcap]

I agree that there are very few quality companies out there that truly look after shareholder interests and give a satisfactory ROIC.
Many managers at all level's of organisations are purely acting in their own interests with little or no regard for the shareholders who put up their risk capital that is employing them.

Are they acting in the companies interest or their own interest? Their own interest being that the company continues to operate and provide them wages/salaries/benefits?. I do note that Directors owe a duty to the company first and foremost. Not to shareholders. Does that mean the Companies Act is not written correctly? That could be a debate for another day.

From memory Sec 131. Duty of directors to act in good faith and in best interests of company.

135 not allowed to recklessly trade
137 Directors duty of care
(a) the nature of company
(b) nature of decision
140 Disclosure of interest.

Not a lot at all if anything about shareholders.

HOwever there are some shareholder protections.
97 Liability of shareholders
107 Unanimous assent to certain types of action
108 Solvency test etc
110-111 Minority buyout rights.


I am not trying to defend directors and management. Just that there are bugger all obligations to shareholders under law. So we as shareholders can whinge all we like but in reality the best course of action we have available if we do not like what directors and management are doing is to sell our shares.

[Beagle]

http://www.legislation.govt.nz/act/public/1993/0105/latest/DLM320657.html
Yes you raise a good point. All references in the Companies Act appear to be for the company overall not its shareholders. One presumes however that if the Directors and its senior management are acting in good faith for the company, its future and its profitability they are acting in the best interests of shareholders but there's so much wiggle room and latitude about what really is in the best interests of the company that human nature being the ugly beast it invariably is inevitably raises its head more frequently than I think many people would ever like to imagine. Herdlicker's recent share sell down a prime recent example.
Yes it was legally allowable within the framework of the companies act but morally..well it had all the morals of an alley cat in my opinion.

[winner69]

A lot of analysis went into the underlying calculations, but at the end of the day it didn't seem to say anything other than returns don't come equally from all your investments.

Lets assume you start with $100k and put it into 10 companies looking for a 10% return. Over the next year one share doubles, one goes up by 50%, 6 have a 5% return and one goes down by 20% and one declines by 50%. Should you be happy? - yes because you have just had an 11% return exceeding your 10% target. How many exceeded their WACC (assuming this was 10%), only 2 of 10 have done that.

This sort of return pattern with a few big winners will generate the results above. The problem is what will be the big winners is hard, and some would say impossible, to spot in advance. If you did it reliably, 20%+ pa returns are available.

What you are saying Scrunch is all correct

However Damodaran wasn’t doing any portfolio analysis.

He analysed individual companies and summarised the individual presults in the table shown.

It shows that in 2018 66.89% of ANZ companies analysed did not achieve a ROIC in excess of their WACC

Only one way to measure profit. There are others

Studies in the USA show that the shares of companies that consistently achieve excess returns generally do better than those that don’t

[blackcap]

http://www.legislation.govt.nz/act/public/1993/0105/latest/DLM320657.html
Yes you raise a good point. All references in the Companies Act appear to be for the company overall not its shareholders. One presumes however that if the Directors and its senior management are acting in good faith for the company, its future and its profitability they are acting in the best interests of shareholders but there's so much wiggle room and latitude about what really is in the best interests of the company that human nature being the ugly beast it invariably is inevitably raises its head more frequently than I think many people would ever like to imagine. Herdlicker's recent share sell down a prime recent example.
Yes it was legally allowable within the framework of the companies act but morally..well it had all the morals of an alley cat in my opinion.

Actually if you think it through, there are a lot of situation where something that is good for the companies long term prospects is not good for shareholders.

Think of say a hydro dam generating electricity. It may be beneficial for shareholders that minimum maintenance was completed and cashflows to expiration given to shareholders (life of asset say 20 years).

However that is not good for the company. The company dies after 20 years. What is better for the company is investing $billions and profits and foregoing dividends to maintain and upgrade said asset. That though will/could have a negative effect on shareholder value....

That just came to mind. There are many many more instances where shareholders and company interests are not aligned.

[winner69]

Enlightened shareholder value is an interesting concept. Seems to be now incorporated into UK company law.

The company needs to consider long term interests

The likely consequences of any decision in the long term of the company’s employees, foster the company’s business relationships with suppliers and customers, consider the impact of the company’s operations on the community and the environment etc etc

More than that horrible concept of maximising shareholder returns.

[Beagle]

Enlightened shareholder value is an interesting concept. Seems to be now incorporated into UK company law.

The company needs to consider long term interests

The likely consequences of any decision in the long term of the company’s employees, foster the company’s business relationships with suppliers and customers, consider the impact of the company’s operations on the community and the environment etc etc

More than that horrible concept of maximising shareholder returns.

LOL your mate Jascinda would be proud of you saying that.