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Buy the shares of good companies

By BABAJIDE KOMOLAFE

The third principle of profitable investment in shares is to, ‘Invest in Good Companies.’ That is, you should buy the shares of good companies. This automatically means that not all companies, especially those listed on the stock exchange, are good companies in terms of  investment. How do you differentiate the good from the bad ones?

The first index is Performance! A good company will always perform well in terms of sales or revenue and make profit. It can be quite difficult to know a good company to invest in, especially in the short term, or when the general economic condition is good and favourable for businesses.

Only few companies can survive crisis or continue to makes sales and profit in crises. That is why performance over a long period of time differentiates a good company from a bad one.  When you want to assess the performance a company for investment purpose, look beyond five years; consider the performance of the company in the last ten years.

The second index of a good company is what the company sells.  Basically, the product or service a company sells can be divided into two namely necessity/essential or luxury/non- essential. Companies that sells products that are necessities or essentials, in other words, product and services that people cannot do without; have a better opportunity of making regular sales.

For example, the services rendered by banks are essential. People and businesses including governments would always need the services of banks. Hence banks would always make money.  Similarly there are companies that sell essential commodities such as detergents, soaps, milk, flour, etc.  There are high possibilities that such companies would always sell. So before you buy the shares of any company, you need to ask, “What does the company sell.

The third index of a good company is management. Who runs the company, how is the company managed. A company may be selling something that people would always need and buy, but if the company is not well managed, the company may not perform well in the long run. We said banks offer essential services, but many banks have collapsed while some are still performing well despite the various and many crises in the financial sector.Shares

The determining factor is management, and how the company is managed. In fact most of the companies that failed or collapsed during the global economic crisis did so due to bad management, and most of the companies that survived, though they are not selling essential goods, did so because of good management. So always consider who is running the company, how are they running the company.

There are so many companies in Nigeria and on the Nigeria Stock Exchange that have all these criteria. But the  most outstanding is Nestle Plc, and that is why its shares as at at last week command the highest price on the Exchange-N860 per share.

Consult before you invest

BY NKIRUKA NNOROM

WHAT doctors are to the sick and auto mechanics to an ailing vehicle, are professional advisers, whether a stockbroker, an accountant or an investment banker to a prospective investor.  Making investment decisions without first of all seeking clarification from or consulting any of these people on how and where to invest could be risky. It amounts to taking a plunge into a deep sea without having a second thought.

As hazardous as this practice is, it is very common to investors in Nigeria. They usually approach the stock market like  like other conventional markets.

Commenting on this attitude, Alhaji Rasheed Yussuff, Managing Director/CEO, Trust Yield Securities Limited, said, “In investing in the stock market, one thing we need to emphasise is that investors need to listen to their advisers because buying shares now at the Exchange is not just a matter of saying, ‘I heard Mr. A say he made money fromthis stock, buy it for me.’ It is a question of seeking advice and I am talking about capital market operators. We do our research and we advice our clients on what share to buy based on the fundamental of that company.

“What I mean by fundamental is that we tell you about the industry in which that particular company is operating; we tell you about the management and the people that are there and we tell you about their corporate governance policy, how long they have being in business, what experience they have and how they have performed in the past.

“We should be able to tell you the general market for their products and therefore, we should be able to say that given the fact that Four Mills for instance, has control of the flour sector and has been operating in the country for some decades and is run by people that have this track record and given the fact that Nigerians,  like anyone else will continue to eat bread, I should be able to tell you that given all the fundamentals, investment in the company or any other flour milling company is not a bad one. Therefore, anybody that has what it takes to operate in that sector should succeed because demand for their product will always be there.”

Investors’ rights under CAMA on New Issues

BY PETER EGWUATU

The Companies and Allied Matters Act (CAMA) provides opportunities for both existing and prospective shareholders of a company to participate in new share issues offered by a company.

When a company wants to raise additional capital to boost its operations, it can issue and sell new shares to the general public.  Also, CAMA allows public companies to issue bonus shares to their shareholders. Therefore, it is the right of a shareholder to benefit from such bonus whenever it is declared.

Bonus shares are free shares given to existing shareholders as compensation for their loyalty and support for the business.  The bonus shares are paid from the undistributed profit or retained earnings kept by a company over some years of operation.

Any shareholder who is denied bonus shares whenever declared by a company has the right to seek redress in the law courts.

Another type of new issues is Rights issue. Existing shareholders have right to partake in rights issue. Right issues are new shares created by a company and offered for sale only to existing shareholders.  Rights issues are not meant for the general investing public. So an existing shareholder can either exercise his/her rights or trade them at the secondary market when he/she does not feel like partaking in the offering.

For example, if a shareholder currently owns five per cent of the total shares outstanding and the company decides to double the amount of shares issued through rights issue, a shareholder has the option to exercise his/her rights and purchase enough shares to maintain his 5 per cent interest.

If an existing shareholder fails to partake in the rights issue, the company has the right to distribute it to other shareholders who might have shown interest. So it pays the shareholder to take up his/her Right issue even when he or she does not have money to buy it.  What the shareholder needs to do is to seek the assistance of a  licensed stockbroker to help him/her trade the rights at the  stock market .

Ordinarily, rights issues are supposed to be issued at a discount. This means that the price at which the offering is made to the existing shareholder should be less than its current market price at the stock.

But in recent times; some companies do not give any discount for rights issue. They have argued that since existing shareholders benefit in bonus shares they should equally patronise and support their companies to raise additional funds and by so doing, ensure their shareholding is  not reduced.


Disclaimer

Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.