7 companies that could devastate your portfolio

Australia and New Zealand Banking Group (ASX: ANZ) last week announced a cash profit of $5,889m for the 2015-16 financial year which is a fall on the prior corresponding period (pcp) of 18%.

The reason?

Well, there are at risk debts and restructuring costs for a start. And then there’s a “derivative credit adjustment” (a provision for derivative positions that have gone against the bank).

Each of these have contributed to what’s called a write-down.

On top of that, six months ago, ANZ reported $700m in “one-off” charges related to an increase in bad debts and increased regulation (sigh).

What’s a write-down?

A write-down is merely a formal recognition in the company’s financial statements that particular assets are not worth what management had originally thought, i.e. they paid too much for the asset in the first place.

Yes, professional management teams can get it wrong just as easily as the average retail investor does when paying too much for their shares in listed companies.

ANZ aren’t the only culprits exhibiting poor capital allocation skills though:

  • Back in early August Fairfax Media Limited (ASX: FXJ) recognised a pre-tax hit to the balance sheet of $989m for adjustments in the carrying value of publishing assets and recognition for impairments due to the internal restructuring of business units
  • Also in August, Santos Ltd (ASX: STO) announced a massive US$1.5b write-down of its Gladstone LNG assets, as reported originally by Mike King
  • In February this year, AGL Energy Ltd (ASX: AGL) announced that they expected to recognise a pre-tax $795m impairment of the carrying value of its gas exploration and production assets, affecting its 2015 financial results
  • Woolworths Limited (ASX: WOW) has announced a running total of over $4.2b in impairment charges since February, mostly relating to the failed Masters hardware retailing experiment
  • In June Amcor Limited (ASX: AMC) announced a US$350m write-down on cumulative foreign exchange losses and a reduction in the value of its Venezuelan business

Then there’s the big-daddy of them all: BHP Billiton Limited (ASX: BHP) announced a whopping $10.3b impairment of its US shale oil and gas assets due to the plunging oil price over the last two years.

The list above is just for starters.

Unfortunately, there are many more culprits on the ASX guilty of impairing the value of the shares you own.

Foolish takeaway

With the S&P/ASX 200 down 5.2% since early August, you may worry about the value of your portfolio, but what you’re doing as a retail investor is no different to what senior executives around the country are doing: allocating capital.

As can be seen above, some of the best paid business executives in the country can still get it wrong, so in that sense, you’re in good company if you’ve bought shares that are now worth less than what you paid for them.

The difference though is that you have the control to avoid buying shares in companies with management that have exhibited poor capital allocation skills and destroyed shareholder wealth in the process.

A long-term buy-to-hold investment strategy is only going to work if the management of the companies you invest in are doing the right thing by the shareholders, i.e. not making bad investments in the first place leading to a financial blood letting later on.

I know that no executive team allocates capital willingly with the view to destroying it, but it happens and you need to be selective about what you invest in.

Look for a track record of sensible capital allocation, and convince yourself that, with a sound investment strategy, you can do a better job than the many detonators of shareholder capital that are currently managing Australia’s largest companies.

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Motley Fool contributor Edward Vesely has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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