INTRODUCTION
In Business terms the purchase of a financial product or a valuable commodity in an anticipation of a favorable future return is regarded as investment. Investment takes places at all levels in our life; it could be individuals investing in their career or upgrading their skills with the view to hold down a lucrative job in the future, others buy properties and sell them later when prices soar in property market. Financial institutions invest in business on which they anticipate returns. A Classical example of investment is the (Dragon Den on the BBC channel) Where renowned moguls who have excel in their various businesses scrutinize individuals and their prospective businesses with the view of investing in them for future returns. If renowned investors like the Dragon Dens who are well versed in the financial sector will go through the trouble of assessing the viability of any business they engaged in, then I suggest is prudent for me to carry out a feasibility studies to get a fair ideal of the pros and cons of the financial market, this include exploring the environment, geographical location, market trend, culture, political history, the stability of the economy etc, I will also take into account the risk aspect, as we all know the higher the risk the higher the return. Choosing the right investment for your money can be very daunting, as there are so many investment opportunities to choose from. Businessdictionary.com described investment portfolio as a pool of investment own by the same or an organisation. These investments include Bonds, shares, derivatives, mutual funds etc. Having financial an asset of �100,000 earmarked for investment, I will set up an investment portfolio and map out a strategy as to how the money will be spend with hope of generating profit. In my quest to invest the funds profitably. I will first of all conduct an investment appraisal to gain an ideal of the all the various investment options. Secondly, base on the outcome of the appraisal, I will consider prospective companies to invest with, and thirdly review my anticipated returns.
INVESTMENT APPRAISAL
According to stone (2008) Assets come in many shapes and form, and for that matter conducting an investment appraisal requires one to be vigilant as there are myriad of investment to choose from, this include premium bond, shares, property, art, life, gilt-edged, assurance policies, pension policies , bank deposit, etc. It is widely believed that diversifying your investment makes you less vulnerable to risk, others ague otherwise as they claim diversity create problem of choice. Hargitay and Yu (1993) added that one of the fundamental problems confronting modern entrepreneurs is the ability to make the right investment-decision. This is because each type of asset has different characteristic, which comes with different level of risk, profit, and capital requirement. Basically, different assets have different degree of return. According to (Pettinger, 2000) the outcome of investment is always affected by those forces outside the control of those involved in the venture. Changes in public taste, consumer demand, interest rates and currency values all have effects that can only partly be predicted, he further reveal that one approach to management of risk is to spread the investment in such a way so as to ensure that the potential for substantial losses is minimized. Lets take for instance an air-condition manufacturer is heavily dependent upon the weather for it product to be attractive. It may expect high demand for its products during the summer. It may experience upsurge in demand for its if there is sudden hot spell either in the spring or autumn, a down turn for its product if the weather is cold or wet during the summer. The risk inherent in investing in such a venture can be spread by diversifying to minimize risk. Eg. Let’s say investing a portion in a umbrella manufacturing company where demand for product will be high during rainy season to make up for loss of earnings in the other ventures. Investors have to wrestle with the issue of choice, which involves establishing criteria to assess the attractiveness of investment proposition. Achieving your investment goals greatly depends on ones ability to find the appropriate investment opportunities and the ability to accurately predict or forecast their past performance. (Faragher and Klieman, 1999). It is also imperative to forecast other related investment performance to ascertain their investment viability. (Pettinger, 2000) further stress that in order for an investor to be fully successful, he or she should be acquainted in advance the extent and nature of the risk involved in each of the sectors, it is not enough to simply apportion parts of the total investment in the hope that things will not be too bad. Another way I will implore to minimize risk is by analyzing the company data, this include examining its annual report and accounts. These documents will provide all the information on a companies business and financial affairs and its obligation to its shareholders. The annual report and accounts will describe the current trading conditions of the company, what is has sold (its turnover, sales and revenues) and what it has to paid out in wages or salaries, rent, raw materials and any other inputs to the costs of production, the documents will also indicate the profit or loss position, the state of assets and liabilities at the start and end of the financial year and the cash flow situation.
Yields are considered important in measuring a company’s performance. The yield is typically expressed as a net percentage (thus after income tax) of the current share price. The long term average yield in the UK is around 3.6 per cent net. In other countries the average yield may be different, for example 2.8 per cent in Japan.
The number of stock listed on the stock markets is increasing. The trend has increase the challenge of selecting stocks to create a portfolio that will have returns. For example, the London Stock Exchange has nearly 3,000 companies quoted; the (FTSE 100) is the main indicator of trends in the stock market. Its name derives from the Financial Times Stock Exchange 100; devised between the Financial Times paper and the actuarial professions, the major companies within the FTSE represent a significant proportion of Britain’s industry and exports. FTSE will change at times to reflect values of companies, which go up and down at times and will always have the top 100 by value, the moment a company drops out of the index its shares will take a fall. New York Stock Exchange (NYSE) already contains more than (2,500) two thousand five company stocks, whiles the National Association of Securities Dealiers Automation Quotations (NASDAQ) stock market lists circa (3,000) three thousand electronics companies, Dow Jones Transportation Averag and Dow Jones Utility Average. This has given the financial managers and individual invested a tough nut to crack when it come to picking the best out of the lot. Academics have long stated that competition among traders eliminates assets mispricing.
Other researchers continue to suggest that investors can seldom achieve superior returns (Walker and Hatfield, 1996; Dellva and Olson, 1998; Weigand et al 2004) therefore selecting stocks with high expected returns to beat the market seems difficult to achieve. Previous studies have discussed several factors related expected stock returns. For instance, Banz (1981) examine the empirical relationship between returns and the market values of NYSE common stocks. According to that study, smaller firms have higher average returns than lager firms do. Moreover, this size effect has existed for at least four decades. Fama and Fench (1992) investigated the same issue, indicating that two variables were consistently related to stock returns. (A)The size of the firm and (B) firm market, book ratio. Adjusting for other factors, Fama and Fench (1992) found that smaller firms yielded relatively high returns, and that returns are higher for stocks with low market/book ratios. They further examined size effect of stock market in different countries and periods (Mills and Jordan, 2003; Jensen et al, 1997) consequently, the may be applied to selected stocks for investment, and that it is not applied to all stock. On the other hand, the present study proposes that the fundamental operating situation and efficiency may impact firm stock price. This concept was based on the study of Brigham and Houston (2007), which indicated that the ratio in the financial statements reflect the performance and efficiency of the company. Investigating in the stocks of the firms with better efficiency should yield better returns. Although evaluating the efficiency of the firm with different input and output is difficult.
It is widely believed myth that acceptance of risk entitles the risk taker to a higher return than a safe investment. For safety the investment should be spread over a number of companies. The old adage don’t all of your eggs in one basket. A common portfolio for a small investor should contain at least 12 companies. The main aim of all investing is to get a decent return with the minimum acceptable risk. if you own shares in one company then the risk and responsibility of losing your money is greater than if the risk is spread. It is a general rule that the lower the risk the lower the return. Conversely, the higher the risk the higher the return. For some people who invest in a single company the reward can be big if the company does well. In truth what usually happens is that large investments in one company will not produce massive returns or resulting in loss of all one investment. The shares will usually carry on rising marginally in the longer terms.
Research suggests that investing in shares is relatively most lucrative investment, and for that matter main objective is to by shares from various utility companies,
Utility stocks come across one of the sector that has clearly establish itself as a strategic player in a multi-asset portfolio due to it stability in the stock market, even during the height of the severe economic downturn in 2008 the utility sector was still going strong. The empirical studies recognized that one of the cardinal reasons investors prefer the utility sector as opposed to other sectors is the superior investment performance. Utility stock offers enormous advantage which makes them attractive. The following are some of the advantages which has influence me towards this sort of sector.
- They are standardize and have fixed prices, but usually get approval from the regulatory body whenever increment is deem appropriate.
- They tend to monopolize the territory they operate. Usually in most cities and towns there is only one provider of electricity, which implies there are no competitors.
- Utilities such as telecommunication, water, gas and electricity are all essential commodity one can not do without.
- They generate consistent income as customer mostly pay their bills on time, this offer the utility sector some sort of steady and predictable income.
- Most utility companies normally pay a large portion of their profit as dividends to investors, this is pretty good as the objective of any investors is to attain decent dividend yield.
- Utility stocks are cohesive, stable and generate slow but steady growth. Below is a five years Graph of Dow Jones Utility which suggest a study growth throughout the period.
- The law allows the utilities to charge rates so that operating financing costs are covered, this allow shareholders to generate reasonable return on their investment.
The benefit above graph suggest study growth trend with enormous benefit at all standard, but it is also necessary to examine the country in which I intend to investment my money, as the benefit alone does not guarantee the safety of my money. I have therefore consider investing a chunk of my �100,000 asset in United State of America and the United Kingdom on the basis that, they have both established solid democratic political environment which allow investors peace of mind without worries of any political chaos, which can potentially affect the market growth or in the worst case scenario losing my entire asset. Other countries like Afghanistan, Pakistan, Palestine, Iraq and Iran, just to mention a few, have their own set of political unrest, investing in such regions may probable generate good returns but it is a big gamble because of it volatility which increase the risk level . Southeast Asia, Russia and some part of Europe also have different set of economic situation, but if the united state falls into a recession it usually have a reciprocal on almost all the major economies. In other words when America goes down major economies like Chinese equities may be roaring along. Another reason choosing United State and UK is that they have enormous liquid equity markets, and a huge number of listed companies which offers me variety to choose from. The effect of Inflation is minimal and if does happen it usually does the influence the expected return significantly. The next paragraph I will explore few utility stock companies in the US and the UK with hope of investing in them.
Historical Dow Jones Utilities Indicator
The utility average was originally 18 stocks, According to Dow Jones, it was increased to 20 in 1929, the average was later abridged to 15 stocks on June 2, 1938, it has remained the same level ever since. The original index included 20 Utility companies broadly defined, this include telephone companies, electric utilities and natural gas, energy product, oil and gas. They are often labeled “widows-and-orphans stocks” term usually referred to stocks with a relatively decent dividend income and financial security. Below are lists of companies I intend to invest my �100,000 asset with.
INVESTMENT DECISION
In the financial market, there are sveral mathod used to measure the theoretical values of the companies and their stocks. This include discount cash flow, Aproximate valuation approaches, constant growth approximation or Gordons growth model also best known as discounted dividend model, limited high-growth period approximation. The P/E method is perhaps the most commonly method in the stock exchange industry.
Consolidated Edison (ED) Dividend Stock Analysis
Consolidated Edison, Inc. (ED), through its subsidiaries, provides electric, gas, and steam utility services in the United States. It provides electric service to approximately 3.3million customers and gas service to approximately 1.1million customers in New York City and Westchester County, as well as provides steam service to office buildings, apartment houses, and hospital in parts of Manhattan. It has been increasing its dividend for the past 35 conservative years, for the past decade this dividend stock has delivered annual average total return of 6.30% to it shareholders. Below is an impressing graph showing Edison performance since May 2009.
Annual average total return of 6.30% to it shareholders. Below is graph showing Edison weekly Performance.the Company has increased the amount of the stock outstanding by an average of 2.6% per year over the past decade. Over the past decade the dividend payout ratio has range between a low of 57% and a high of 97%. Currently the dividend payout ratio is at 69.60%. Whiles this would be high for a company like McDonalds (MCD) or Procter & Gamble (PG), a payout of 70% is not uncommon for utilities. Thus utilities tend to generate stable earnings and revenues in any economic conditions, as people keep using water, gas and electricity in their daily lives no matter what. Last years dividend yield was 6.10% and current share price at 44.26
The Price/earnig Ratio = 44.26/6.10 = 7.26. I am therefore investing 25% ( 38,117.50) dollars) of my 100,000 asset with consolidated Edison, this implies that, I will be hoping for approximately 2,767.33 dollars in one year on top of my investment.
BRISTISH TELECOM GROUP (Dividend Stock Analysis)
BT is one of the UK’s best known companies. But we are also recognised for being a truly global organisation providing products and services in over 170 countries around the wold.In 2009, BT Global srvices revenue increased by 12% to �8,828m. 2008: �7,889m, 2007; �7,312m. compared with growth of 8% in 2008. Revenue in 2009 includes the impact of foreign exchange rate movements of �588m and acquisitions of �368m. Revenue from outside the UK has increase to 47% BT Global Services total revenue(2008:40%, 2007:36%), relecting the impact of organic growth as well as the impact of foreign exchange movement and overseas acquisition.the increase was driven by growth in revenue from networked IT services reflects the impact of foreign exchange rate movement and acquisitions, together with UK calls and lines
British Telecom’s dividends are normally paid twice a year, with final dividends paid in September, and interim dividends in February. Payments for 2009/10 and 2008/09 are:
|
Financial year |
Dividends |
Amount |
Payment date |
Record date |
|---|---|---|---|---|
|
2009/10 |
Interim |
2.3 |
8 Feb 2010 |
29 Dec 2009 |
|
2008/09 |
Final |
1.1 |
7 Sep 2009 |
14 Aug 2009 |
|
2008/09 |
Interim |
5.4 |
9 Feb 2009 |
30 Dec 2008 |
The full year dividend for 2008/09 was 6.5 pence per share.
Current share price @ March 2010 at 121.70p on the LSE
Price/earnig Ratio = 121.70/6.5 = 18.75. I am therfore investing 20% of my 100,000 (�20,000) asset with BT. This implies that, I will be hoping for approximately �3,750 pounds on top of my investment in one year depending on inflation and market demand. Though the P/E is low, my share in the company is intact and there is still prospect for growth in the future as populations grows and people can not do without communication so will demand for British telecom grows.
Kinder Morgan Energy Partners, L.P (Dividend Stock Analysis)
Kinder Morgan Energy Partners, L.P. owns and manages energy transportation and storage assets in North America. Kinder Morgan is a dividend achiever as well as a component of the Standard and Poor 500 index. It has increased distributions for the past 13 years. For the past decade this dividend growth stock has delivered annualized total returns of 17.40% to shareholder. At the same time company has managed to deliver an average of 14.20% increase in it cash flow per unit since 1999. Annual distributions have increased by 12.10% on average over the past 10 years. A 12% growth in distributions translates into the dividend payment doubling almost every six years.( KMP) keeps energy on the move throughout the US. The company holds stakes in more than 28,000 miles of natural gas and petroleum products pipelines and owns 170bulk terminals and rail translating facilities.
History data suggest that Kinder Morgan has actually managed to double its dividend payment every five years on average. Based on the above statistics,. Current share price @ 63.96 and Last years earnings per share @ 1.050 x 4 = 4.20, This is because it is done quarterly
Price/earnig Ratio = 63.96/4.20 = 15.22. I am therefore investing 15% ( amount in dollars 22,870.50) of my 100,000 of my funds with Kinder Morgan Energy, this implies a profit of $3480.89 in a year on my investment.
Duke Energy (Dividend Stock Analysis)
Duke Energy is one of the leading elcetric power companies in the United states, supplies and delivers energy to approximately 4 million U.S. customers. The company has approximately 36,000 megawatts of elcectric generating capacity in the midwest and the carolinas, and nutural gas distribution srevices in Ohio and Kentucky. In addition, Duke Energy has 4000 megawatts of electric generation in latin America, and Joint-venture partner in a U.S real estate company.
Duke Energy Current Share price @ $16.44 and last years earning per share was 0.24 by 4 because it is done every quarterly as indicated on the above chart. Therefore applying the price/earning ratio.
It is done quarterly as indicated on the above chart, therefore to get the annual per share yield will be 0.24/4=0.96. so price/earning ratio = 16.44/0.96 = 17.13 I am therefore investing 15% (amount in dollars 22,870.50) of my 100,000 of my funds with Duke Energy, this implies a profit of $3917.72 in a year on my investment.
British Gas Group (Dividend Stock Analysis)
British gas is one of UK’s largest domestic energy supplier and part of Centrica a top 30 FTSE 100 company. British gas provide electricity gas and home repair to millions of customers in Scotland, Wales and England as a leading energy supplier, more people choose British gas to supply energy to their homes than any other supplier in the UK. Below is a chart and Graph illustration their performance in the stock market and graph showing a favourable future prospect.
Bristish Gas Group financial Highlight for 2008 and 2009
British gas current Share price @ � 1,177.00p at the time of buying and last years earning per share was 12.8p as indicated on the financial highlight table. Therefore applying the price/earning ratio.
Price/earnings Ratio =1,177.00/12.8 =91.95. I am therefore investing 15% (15,000) of my 100,000 asset with British Gas Group. this implies a profit of approximately 13,792.50 depending on the market trend and inflation issues.
The rest of my asset will be deposited at Barclays Bank as a saving accounts with annual intrest rate of 3.06% tax free. This a liquid cash I could fall on in case of any future eventuality. As a contingency to cater for any unforseen circumstance in my investment. This implies that �10,000 could potentially earn me a return of �306.
SUMMARY OF MY �100,000 INVESTMENT PORTFOLIO & EXPECTED RETURN
|
COMPANY |
NPV |
NPV |
EXPECTED RETURN |
AMOUNT IN POUND £ |
|
Consolidated Edison |
25,000 |
38,117.50 |
2,767.33 |
1,814.99 |
|
British Telecom Group |
20,000 |
30,494.00 |
3,750.00 |
3,750.00 |
|
Kinder Morgan Energy Partners |
15,000 |
22,870.50 |
3,480.89 |
2,282.99 |
|
Duke Energy |
15,000 |
22,870.50 |
3,917.72 |
2,569.50 |
|
British gas Group |
15,000 |
22,870.50 |
13,792.50 |
13,792.50 |
|
Reserved Savings Account |
10,000 |
15,247.00 |
306 |
306 |
| 1.5247 pound/dollar exchange rate |
100,000 |
152,470.00 |
24,515.98 |
CONCLUSION
I will be looking at a profit of approximately �24,515.98 pounds in the next one year on my investment. It could be a bit more or less depending on the market trend and economic factors like inflation, demand and supply etc.there is no universal set of criteria exist for the measurement of investment,each venture is unique, and therefore requires its own individually agreed set of criteria.
http://stockvaluationmodel.com
hhttp://finance.yahoo.com/q?s=Ed
ttp://www.dividendgrowthinvestor.com/2008/12/best-high-yield-dividend-stocks
http://www.dividend.com/historical/stock.php?symbol=KMP
http://www.morningstar.com/
http://www.dividend.com/dividend-stocks/utilities/electric-utilities/aep-american-electric-power/
http://quicktake.morningstar.com/stocknet/stockreturns.aspx?symbol=duk
http://www.bank.barclays.co.uk/Savings/ISAs/CashISAGoldenISAIssue2/P1242569005970