Wednesday, October 22, 2008

Shareholders should look for companies with fiscal disaster plans

One thing to consider for shareholders with stocks in New Zealand listed companies is managements planning for and reaction to the current credit crises and its associated recession-the one we are currently experiencing is the work of Michael Cullen, New Zealands Finance Minister.

The current recession is going to get worse because of the downturn in the global economy and that is clearly going to affect business in this country and our business leaders, CEOs and directors are going to be soundly tested over the next couple of years as they try to manage their businesses through a recession that could be worse than the one in the 1970s if not managed properly and may very well last longer.

How well have our CEOs prepared for this?

The recession in New Zealand has been indicated by the economic numbers for more than 6 months, so as shareholders we should expect that prudent managers have put the necessary groundwork into a business plan that will get them through the hard years coming.

What plans should they have made?

Well, clearly cutting any unnecessary costs first would be a priority, but there are a number of other things that could and should still be done and you should do some thorough research into our NZX listed companies above and beyond the normal facts and figures one looks at. How management have spent their shareholder dollars in the past and whether they even have plans to get them through a recession are a couple of good points to start on.

Pay down that outstanding debt as much as possible and cut back dividends (I know, that is hard to say) to shareholders and use that to pay down debt in the future-interest rates are set to rise and the terms of lending and the ability to borrow will be tougher.

Cull company middle management as much as possible, little is done by middle management anyway so they wont be missed and the company team will be able to communicate better and more efficiently without them.

Forgo massive directors fee price hikes. Now isn't the time for a pay rise and the next reporting season in February isn't likely to make shareholders think you deserved a rise anyway.

On average, of the 18 odd companies that I have shares in, directors are asking for around 25% more than last year. They don't deserve that much based on the August reporting season, let alone next years results.

Contact Energy for example are asking for 100% more in directors fees! I know, its more over the top than a pregnant Dolly Parton.

Re-visit contracts with suppliers and negotiate lower prices for future contracts where possible. The current economic climate will mean that some companies will do better deals just to do business-hopefully not the one that you own shares in though.

Put off non-core related capital spending-those company Commodores will last another few years more and image isn't everything if it means there is no company left because you just bought or leased 50 spanking new Toyota Prius'.

Good management will be cost conscious even at the best of economic times and that is clearly the best preparation for the tough times.

Some Kiwi listed companies that have done this well are Mainfreight, Freightways, Michael Hill International and Hallenstein Glasson.

Companies that have done this poorly include Sky City Entertainment, Auckland International Airport ,The Warehouse and Contact Energy.

I am a little annoyed that along with the vast amount of shareholder correspondence that we have all received this reporting season, scant column inches have been devoted to mapping out a plan for individual companies and how they will deal with a long economic downturn.

Yes, it would be nice to know our companies have a plan.

Good fiscal management should be a matter of course for all companies, countries, finance Ministers and individuals because living beyond ones means can get one into trouble and planning before a downturn hits can be crucial for company survival.

But even as we continue our way through the recession continued financial prudence is needed, even by those who have already prepared.

For those who haven't?

Well, some are definitely going to fail and that is just the way it should be.

Disclosure: I own Mainfreight, The Warehouse, Michael Hill, Freightways, Sky City, Auckland Airport and Hallenstein shares.

c Share Investor 2008