There’s nothing worse than analysts labelling a company “dead money”, the slang term given to an investment that’s unlikely to produce a positive return for the foreseeable future.
If the investment truly is dead money, the likelihood of a turnaround is low, and investors should consider selling the shares before incurring additional losses.
Unfortunately, the market seems to think that Standard Chartered (LSE: STAN), Anglo American (LSE: AAL) and Centrica (LSE: CNA) are dead money, and it’s easy to see why.
Indeed, over the past five years shares in Standard, Anglo and Centrica have all drastically underperformed the wider market, even including dividends. In fact, the performance of these companies has been so bad it would have been better for investors to have saved their time, and money and not invested at all! Since mid-May 2011 shares in Centrica have lost 36%, Anglo is down around 80% and Standard’s shares have lost 69% of their value.
A return to the highs?
It doesn’t look as if Centrica, Standard and Anglo are going to return to their former glory any time soon. These three companies are all facing huge cyclical and structural pressures, which are unlikely to work themselves out anytime soon.
For example, Centrica is struggling with falling energy costs, increasing regulation, increasing competition and a high capital spending bill. To try and get a handle on some of these factors the company recently announced that it would raise £700m by way of a share placing to institutional investors. But the way the company has gone about this placing has raised some serious concerns. Indeed, while management has stated that the funds are to help the group pay down debt and fund acquisitions, around half of the cash will be returned to investors via dividends this year. This begs the question: if the company needs to save cash, why not cut the dividend rather than asking shareholders to effectively pay their own dividends?
Cutting costs
Anglo has made the decision to cut its dividend payout to save cash but this decision alone won’t save the company. Anglo is plagued by a high debt load and unless commodity prices recover rapidly, the company will be facing years or uncertainty as it tries to sell off assets, cut costs and generate a return for investors.
However, the company’s drastic cost-cutting can only go so far and the company can’t cut capex much further or it’s at risk of chronically under-investing in its mines, which would only cost the group more in the long run.
Anglo it seems is stuck between a rock and a hard place.
A complex bank
It’s difficult to tell what’s going on at Standard. Even the most prominent banking analysts in the City have trouble interpreting the balance sheets of banks and this is a huge risk for investors.
Standard’s loan book is the bank’s biggest problem. Years of ‘growth at any price’ has lumped the bank with many loans that are now turning sour. Loan impairment losses hit a peak of £756m in the three months to the end of December 2015 but more than halved to £323m in the first quarter.
The question is, as China’s economy slows, will Standard’s loan losses start to grow again?
