You are an investment advisor. Based on the information provided below and your own market research on the companies, you are required to recommend to your customer which of the companies’ shares are better value for money? In your recommendation, include all the calculations and market information on which your recommendation is based. You may also include the assumptions which you made about your customer’s financial situation when recommending purchase of the below company’s shares i.e. short and long term goals etc.
Telstra’s dividend policy Broadcast dated 21/10/2012 retrieved 25/10/2013 from http://www.abc.net.au/insidebusiness/content/2011/s3615178.htm
Telstra’s financial highlights (Retrieved 25/10/2013 from
National Australia Bank Ltd
NAB’s half yearly profit and dividend retrieved 25/10/2013 from
National Australia Bank’s financial highlights (Retrieved 25/10/2013 from
#1. When recommending which company’s shares is better value for money, we should not only look into how these two companies are performing in their respective industry BUT also how their competitors are performing. Reason being if I’m looking to invest in banking shares, I’ll be looking into how NAB is performing in comparison to CBA, ANZ and Westpac at least.
#2. The other important factor to consider is the regulatory changes impacting the industry.
For example, how Telstra’s bottom line is be impacted by the roll out of National Broadband Network. The other factors that needs attention is the company’s compliance history i.e. http://www.acma.gov.au/Search?s=509&f=522
On 22 November 2012, Telstra contacted the ACMA (Australian Communication and Media Authority) to advise that in April 2012, it identified that it had overcharged 260,165 consumers a total of $30 million for international data roaming sessions. The overcharging began in October 2006. Telstra became aware of the issue on approximately 28 March 2012, during an investigation into an international roaming customer billing complaint. Upon discovering that the customer in question had been charged multiple session flagfall fees for a single session, Telstra initiated a wider investigation and audit.
Similarly in 2004 NAB lost $360million due to foreign exchange Shares in NAB fell 23 cents to $31.61National Australia Bank Chief Executive Frank Cicutto resigned following disclosure that the Bank could lose up to $360 million in foreign exchange trading losses. The Board immediately appoints a new CEO.
The forex scandal followed a number of losses at NAB which raised questions about the effectiveness of its risk management systems, controls and internal reporting.
#3. Key management changes could either increase or decrease the share prices.
#4. Mergers, acquisition and sale of business could also impact the share prices. Telstra recently sold stake in Sensis. This could have positive or adverse effect on it share price.
#5. As for financial tools to work out the value for money we can use ratio analysis and critique financial statements such as:
- How liquid is the firm (In 2008 Lehman Brother collapsed triggering the Global Financial Crisis primarily due to the liquidity position. The bank was solvent in other terms, the asset position was greater than the liability position).
- Is the management generating sufficient operating profit. ( You have be careful of one off profit from sale of assets). I remember HSBC Australia made good profit on the back of selling off eTrade to St George Bank.
- How is the company financing its investments? Retained earnings, issue of additional shares or bonds or bank debt. Issue of shares and bonds generally means the financial health of the company is strong as opposed to bank debt.
- Are shareholders receiving adequate returns on their investments? What are your thoughts on Telstra shares or NAB shares?
Leverage ratio i.e. Debt Equity ratio,
Profitability ratio i.e. Return on total assets and Return on equity
You can compare this to other players in the industry or do a trend analysis to see where the company is heading.
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