Stock mar­ket Part II: Case for eq­ui­ties

Chronicle (Zimbabwe) - - Business Chronicle -

can choose from. Over the same pe­riod, there are a num­ber of stocks that have posted pos­i­tive gains. More critical is the need to in­vest in solid busi­nesses, with strong man­age­ment, brands and good cash gen­er­a­tion. While in the short run, the stock mar­ket can be volatile and un­pre­dictable, em­pir­i­cal ev­i­dence shows that eq­ui­ties are the best form of in­vest­ment in the long run.

In ad­di­tion, the most im­por­tant driver of fu­ture re­turns from any in­vest­ment is the price you pay at the out­set. In other words, val­u­a­tions mat­ter more than growth prospects. It is not the ab­so­lute level of growth that de­ter­mines an in­vest­ment out­come but the ex­tent to which it is in the price when you buy. Be­cause of the cur­rently de­pressed stock mar­ket prices, this presents an ex­cel­lent en­try op­por­tu­nity for bar­gain hunters. The prob­a­bil­ity of in­vest­ing in a ris­ing star is greatly im­proved when prices are this low, pro­vided they are fi­nan­cially sound and well man­aged. There are an abun­dance of such com­pa­nies trad­ing on the ZSE.

You in­vest for div­i­dends While on av­er­age, gen­eral com­pany prof­itabil­ity has been on a de­cline, listed en­ti­ties have con­tin­ued to pay div­i­dends in some in­stances in­creas­ing the pay­out ra­tios. Most (well run) com­pa­nies en­gaged in capital ex­pan­sion projects soon af­ter dol­lar­i­sa­tion, to re­tool their busi­nesses af­ter decades of de­cay, such that at the mo­ment most of the prof­its are passed on to share­hold­ers as div­i­dends. BATZ just paid 100% of its earn­ings while Delta, in ad­di­tion to their nor­mal div­i­dend, also paid a spe­cial div­i­dend to their share­hold­ers. This was de­spite the fact that both of these com­pa­nies have wit­nessed de­clin­ing prof­itabil­ity.

Fur­ther­more com­pa­nies like CBZH and Econet have, in ad­di­tion to the div­i­dends dis­trib­uted, en­gaged in share buy­back programmes, fur­ther pass­ing on cash (a form of re­turn) to share­hold­ers. In ad­di­tion to pro­vid­ing in­vestors with a re­turn, a com­pany ‘buys back’ its shares if it feels its shares are un­der­val­ued and be­cause the com­pany is bullish on its cur­rent op­er­a­tions.

A high level anal­y­sis shows that there is cur­rently an at­trac­tive div­i­dend yield on the ZSE vs. the cur­rently pre­vail­ing low interest rate en­vi­ron­ment. The ZSE as a whole has an av­er­age div­i­dend yield above five per­cent, which not only is high by any stan­dards but higher than some interest rates of­fered by the solid first tier banks. You can ac­tu­ally view these div­i­dends as a vari­able coupon pay­ing bond with also a chang­ing face value. Again, as men­tioned above the key is stock se­lec­tion, just like you will not place any of your funds with some banks since you risk los­ing your prin­ci­pal and miss­ing out on the interest pay­ments.

While for smaller play­ers, the div­i­dends might be lit­tle be­cause of the smaller out­lays in­volved, the same ap­plies to fixed in­come in­vest­ments. If you need a higher interest pay­ment, you need to put in a size­able prin­ci­pal in­vest­ment. The good thing with the stock mar­ket is that it of­fers an up­side po­ten­tial to the prin­ci­pal in ad­di­tion to the ‘interest’ pay­ments.

Cash flows, power, con­trol and in­flu­ence In any busi­ness, whether a start-up or an ex­ist­ing be­he­moth, you only in­vest so you can reap re­wards in fu­ture; which in most in­stances are very un­cer­tain. More so, be­fore you en­gage in any busi­ness ac­tiv­ity you un­der­take some re­search to de­ter­mine feasibility, risks, and so on. That same ap­proach also ap­plies in eq­ui­ties in­vest­ment and even sweeter, some­one can do the due dili­gence on your be­half! In­vest in a busi­ness you un­der­stand that also has good prospects (and mind you, there is a huge dif­fer­ence be­tween in­vest­ing and spec­u­lat­ing).

While con­trol and in­flu­ence are also some of the ma­jor de­sires for in­vestors, they are not the ul­ti­mate. The ZSE and Se­cu­ri­ties and Ex­change Com­mis­sion of Zim­babwe have also put in place mech­a­nisms to pro­tect mi­nor­ity in­vestors against abuse by ma­jor share­hold­ers. As a share­holder, re­gard­less of your stake, you have a right to de­ter­mine how your com­pany is run through par­tic­i­pa­tion and vot­ing in An­nual Gen­eral Meet­ings. This is one area that has been ne­glected by in­vestors in Zim­babwe as they tend to be very docile.

In con­clu­sion, while the stock mar­ket might not be an ideal in­vest­ment for each and every in­vestor, it is im­por­tant to con­sider it as an al­ter­na­tive so you can di­ver­sify your port­fo­lio and also ac­cess re­turns or benefits of be­ing a share (stake) holder in a big­ger en­tity with economies of scale. Over time, eq­ui­ties can pro­vide op­por­tu­ni­ties for growth in a di­ver­si­fied port­fo­lio and help pre­serve pur­chas­ing power.

The writer gave an ex­am­ple of re­turns a fixed in­come player could have achieved since dol­lar­i­sa­tion. While that ana­logue could be true, there is a risk that the in­vestor could have lost their money through Ponzi Schemes, bank col­lapses (we have had a num­ber fold­ing!), and so on. Now, I see risk as the per­ma­nent de­struc­tion of capital.

A de­cline in the stock mar­ket is a short term loss in capital but it is not a per­ma­nent loss of capital. Hold­ing money mar­ket as­sets in hy­per­in­fla­tion­ary times amounted to a per­ma­nent loss of capital. Hold­ing money mar­ket as­sets in the cur­rent en­vi­ron­ment might re­sult in a per­ma­nent loss, but hold­ing real as­sets like eq­ui­ties does not re­sult in such a loss.


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