Q&A with CMMB Securities

Q. Your column a while back mentioned being careful about reading annual reports. What should I be lookig for when checking the reports of companies I invest in?

Harriram, Tunapuna

A: Annual reports are a good source of both qualitative and quantitative information about a company. How you go about reading an annual report depends on your purpose. If you are a shareholder you want to be able to assess factors such as profitability, growth, stability, dividends and risks which all affect your investment in that company. Qualitative information could be found in the Management Discussion and Analysis and the Chairman’s Statement. Generally, this section should highlight the economic conditions and specific factors affecting the company results as well as goals that were achieved, goals missed and goals to be achieved, any risk factors and how the company plans to mitigate these risks.

This latter section, which focuses on the company’s growth and risk strategy, is vital to an equity investor because it determines the future growth potential of the stock price and the company’s ability to pay dividends. When the following year comes along, you would be able to assess whether the company achieved the goals stated in the previous year, which in turn gives you an idea of the quality and efficiency of its management. The Financial Statements, notably the Balance Sheet, the Profit and Loss Statement and the Cash Flow Statement, should be carefully examined and more importantly, the notes to these statements should be read. Analysts examine these statements in detail and calculate various ratios to determine the profitability, efficiency and risk of the company.

If you are unfamiliar with financial statement analysis, you can make general observations such as the general sources of revenue for the company, whether it is diversified or dependent on one income stream and how the company has been able to contain its costs. This will then lead you to think about the industry the firm operates in and ascertain whether the industry’s prospects are positive. Other items that should be examined include the growth of profits, operating income, dividend payments and trends over the past five years. The list of directors and their interest in the company are also declared in the annual report. You can examine whether these directors are reputable and the extent of their interest in the company.

Q. Why are some stocks in America called Blue Chip and is there any equivalent in TT?

Roxanne, Marabella

A: A Blue Chip stock refers to a stock with a history of steady earnings in both good and bad times, a consistent dividend payment record, and a sustainable growth rate. Furthermore, a Blue Chip Company is typically long established, reputable, sizeable and held in high esteem by investors. Blue chip companies are usually leaders in their respective industries. The popular US market index, the Dow Jones Industrial Average (DJIA), comprises 30 blue chip stocks. Familiar names, such as IBM, General Motors, Walt Disney and Microsoft are included in the DJIA. Blue Chip stocks are normally expensive relative to other stocks. In fact, the name “Blue Chip” came about because in the game of poker, the blue chips were the most expensive or most valuable ones.

Blue Chip stocks are considered safe, especially if the market is on the downturn. This is in contrast to penny stocks, which are stocks selling under $5 and are the newer companies with little operating history. Blue Chip stocks do not necessarily perform well. For instance, Eastman Kodak and AT&T, which were stocks included in the DJIA, have performed poorly over the past few years. Consequently, in April 2004, these stocks were dropped from the index.

In Trinidad and Tobago, we do not normally classify any locally listed stocks on the TTSE as Blue Chip, even though there are a few stocks that meet some of the criteria, albeit within the context of our region. For example, over the past six years, Republic Bank (RBL) has delivered consistent earnings and dividends. However, the Bank is relatively small, in terms of total assets and market capitalisation, when compared to its rivals, RBTT and FCB. Neal & Massy, which is a large conglomerate, has maintained consistently increasing dividends over the past six years however, its earnings fell sharply in 1999.