What I’ve learned from investing in Carillion

I see investing as a constant opportunity to learn and improve my financial understanding of the world. For the last few weeks, my friends have heard me talk about an investment I made which went south big-time a few weeks ago, losing 75% of it’s value almost overnight. The investment was in international facilities management and construction company, Carillion plc.

Although I only own a modest sum of publicly listed shares, I take trading as seriously as any other investment, and have a number of criteria a share has to hit before I invest in it.

  1. The share has to yield more than 4% in dividends
  2. The dividend has to be covered by more than 1.5x earnings
  3. The dividend has to have grown by at least 2% over the last five years
  4. The company cannot have net gearing of more than 300%
  5. The company must have had positive cashflow for 8 of the last ten years
  6. I must be able to understand what the company does

When I originally invested in Carillion, the company passed all these tests, but despite this the share gradually lost 15% of its value from purchase, before falling from 180p to just over 50p a share within the space of three days in July.

What have I learned?

Other than a rising debt load, the main thing that I’ll avoid next time is a company which is being significantly ’shorted’ by the market. When an investor ’shorts’ a share, they borrow it from a third party and sell it to the market, later buying it back for a cheaper price and returning it to the person that lent it to them, whilst keeping the profit from the sale and re-purchase of the share.

If a company is heavily shorted, I now wonder whether it’s an indication that ’insiders’ know that whatever the management are saying publicly is a load of baloney. Although in the case of Carillion, I doubted this, I was proved wrong when the company had to make allowances for £845m of contractual problems out of the blue one Monday, despite the usual corporate-speak of ’strong and stable cash flows’ and ’strong contractual relationships’.

Regardless of the hideously precipitous collapse of the share price, I’ve continued to hold my shares – although the dividend has been hiked, I’m holding out for new management to right the ship, and perhaps one day to sell them at a small profit – although I suspect that one day may take many, many years to arrive…

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