As investors we all have companies on our watchlist we would love to buy. Some we probably should. But others, despite their allure, have traps that should be avoided.
Here are three companies that you would probably love to buy in 2015, but shouldn't.
#1 Woodside Petroleum Limited (ASX: WPL)
Why you want to buy:
Woodside has been bucking the trend of low oil prices by increasing prices for its Pluto LNG production and announcing a huge dividend. The dividend is set in U.S. dollars which, when converted to AUD at the current exchange rate yields a massive 9%.
Why you shouldn't:
Although Woodside has been a strong performer in the last 12 months, with record revenues and record annual production, some commentators have questioned if Woodside has reached its peak.
Production in 2015 is forecast to be at or below 2014 levels, while the company's reserve life for proved and probable reserves (based on 2014 production) stands at 13.5 years. So although current cash flows are very attractive, to keep growing over the long term Woodside will need to start investing in significant capital expenditure.
#2 Telstra Corporation Ltd (ASX: TLS)
Why you want to buy:
Telstra Corporation is a blue-chip favourite which we know and love. It has a dominant market position which drives reliable cash flows and dividends, aligning it with the needs of long-term investors.
Why you shouldn't:
With shares currently trading at $6.60, Telstra trades at a price-to-earnings ratio of over 17, which is reasonable for a high quality company, but no bargain. By comparison, New Zealand telco company Spark New Zealand Ltd (ASX: SPK) sells for just 13x earnings and pays a higher dividend yield of 5.78%.
#3 Newcrest Mining Limited (ASX: NCM)
Why you want to buy:
Newcrest is a contrarian play and a turnaround opportunity. The company has slashed costs and is starting to produce free cash flow again. Newcrest also has one of the largest pools of gold reserves in the industry.
Why you shouldn't:
At the heart of Newcrest lies a big chunk of debt which the company is battling to reduce. As at 31 December 2014, Newcrest had net debt of $4.291 billion.
Newcrest reported free cash flow of $268 million for the first half of financial year 2015 (FY15), and despite allocating 96% of that ($257 million) to paying down debt, the depreciating Aussie dollar relative to the US dollar means gearing actually increased very slightly from 33.8% at 30 June 2014 to 33.9%. Debt repayments are made more difficult by the continuing uncertainty of gold prices.
