The belief that only highly regulated utility companies are allowed monopolies in today’s Britain is belied by BT’s (LSE: BT) natural monopoly over nearly all of the UK’s last mile phone and broadband infrastructure. Unsurprisingly, owning the infrastructure that other telecoms companies must use is a highly lucrative business for BT. Indeed, the Openreach subsidiary that controls this infrastructure provided 34% of group profits over the past year.
Heavy reliance on what’s essentially a rent-seeking activity makes me wary of owning BT as politicians, the public and competitors continue to pressure industry regulator Ofcom to take drastic steps such as forcing BT to spin out Openreach. While Ofcom didn’t take this step in its latest industry review, it remains an open possibility if broadband speeds across the nation continue to lag behind other developed countries.
This state of flux in its cash cow business couldn’t come at a worse time for BT as it invests over £14bn to expand its ‘quad-play’ packages of TV, mobile, fixed line phone and broadband. While these packages can be highly profitable, competitors such as Sky and Virgin Media are also racing to expand their offerings. Competing in a highly competitive industry while the Sword of Damocles hangs over BT’s head in the form on any changes to Openreach is enough to make me avoid the shares.
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Cash burn
Online grocery delivery service Ocado (LSE: OCDO) is no stranger to the pernicious effects of competition. Stealing market share from traditional grocers continues, but any path to long-term sustainable profits continues to elude Ocado as these grocers expand their own online offerings and e-commerce juggernaut Amazon begins to roll out its own grocery delivery service through a partnership with WM Morrison.
Intense competition is why retail gross margins shrank last year to 29.2% and operating margins were essentially non-existent. The company can ill afford shrinking margins as it continues to invest heavily in infrastructure. Without cash from operations to fund this capex, the company has turned to the debt market and net debt rose 27% to £127m at year-end. Burning through cash and intensifying competition from deep-pocketed rivals are reason enough for me to avoid Ocado in May.
Dividend cut ahead?
The bad news continued for Aberdeen Asset Management (LSE: AND) as the past three months marked the 12th successive quarter of net outflows from the emerging markets-focused asset manager. These outflows filtered through to the bottom line as revenue and profits plummeted 20% and 46%, respectively, year-on-year.
The situation is unlikely to improve any time soon. Management admitted “we remain vulnerable to further outflows over the next few quarters as clients continue to react to the difficult conditions for performance over the last few years.” The company itself expecting things to get worse before they get better is reason enough for me to avoid shares of Aberdeen in May. This is especially so as analysts forecast 2016 profits to fall far enough to leave the 7.3% yielding dividend uncovered and vulnerable to being slashed to save cash.
