The NZX is a tiny market by world standards, but that doesn’t mean there aren’t good investing opportunities here at home.

Yes, it’s true we don’t have many groundbreaking companies, and it’s also true we lose most of our best companies to the ASX.

However, investing is all about finding value in unexpected places.

Most people wouldn’t look to New Zealand to find stable cash-flowing companies with almost zero competition.

Yet New Zealand is full of them.

I’m talking about monopolies.

What is a monopoly?

“A monopoly is a market where only one entity produces a particular good or service, and no other entities can produce the same good or service.”

In other words, a monopoly is when a company has no competitors.

Monopolies are usually discouraged or outright illegal in many markets, because they can lead to abuse of power.

For example, imagine if all the power lines were controlled by one company, and they charged you $10,000 a month for electricity. Of course, that price is outrageous, but you don’t have a choice. They’re the only provider!

This is why competition is encouraged and facilitated by governments, and why many monopolies are regulated – to protect consumers against monopolistic behaviour.

However, in many markets, monopolies are normal and even necessary.

These are termed natural monopolies.

A good example is a railroad.

If a railroad is built throughout the country, it can serve the country’s transport needs easily.

It makes no sense for another company to come in and build another set of rail tracks right beside it, just for the sake of creating competition. Imagine five sets of rail tracks running side-by-side up and down the country – wouldn’t that be ridiculous?

It makes more sense for the government to simply regulate pricing on the first railroad, which is generally what happens.

What are the advantages of a monopoly?

Most advantages are obvious:

• You have no competition so you never need to worry about customers being taken.
• You get to control pricing (within the law) so you should always be profitable. If your costs go up, just raise your prices. The customers aren’t going anywhere!
• You are often so important that the government protects you. For example, if the airport is going bankrupt, the government will likely bail them out. Otherwise, the country has no airport!
• Monopolies usually can’t expand or grow significantly, so their dividends are usually generous. After all, there’s nowhere else to spend their profits. Once a railroad is built throughout the country, what’s left to do? Build another one?

All in all – monopolies are great because unless the CEO and board are complete monkeys, you’re almost guaranteed to make a profit and stay in business in the long-term.

For risk-averse investors, these are ideal investments. It just so happens New Zealand is full of them!

Why does New Zealand have so many monopolies?

New Zealand is a small country and insignificant on a global scale – that’s the reality.

Due to our tiny size, monopolies are natural here.

With such a small population, it’s not feasible to have ten different companies competing for customers.

Australia might have four or five airlines, but in New Zealand there is only room for one.

Or take Sky TV for example. Spark tried to enter the market with Spark Sport and compete, but they bailed after a few years. There just isn’t enough money in that market to justify having multiple players. The market works most efficiently with just one.

What monopolies can you invest in in New Zealand?

Here are a few of the key monopolies available to investors in New Zealand:

Skycity

Skycity runs the only (legal) casinos in the country, and the government has all but confirmed it will stay this way. Yes – this means it’s likely Skycity will never have a competing casino anywhere in New Zealand! Not to mention, the casino business is extremely lucrative. Every game in the casino has odds stacked in favour of the house, meaning it’s literally impossible to lose money over the long term if costs are managed properly. Skycity re-invests a lot of its gaming profits into real estate, such as its new hotel and convention centre, but also pays a generous dividend.

Sky Network Television

Only one company can own the TV rights to NZ rugby, and it’s Sky TV. Since the favourite (and often only) pastime in New Zealand is watching sport and drinking, Sky TV’s business is rock-solid. They are currently the only pay-television network in New Zealand, and after the short-lived attempt from Spark Sport to make this market a duopoly fizzled out in 2022, it looks like it will stay that way for the foreseeable future. The previous management butchered the business by trying to re-invest profits into all kinds of nonsense, but under new CEO Sophie Maloney, the business has gone back to doing what monopolies do best – sell your monopoly product, let the cash flow in, and pay it all out as dividends to happy shareholders.

Auckland Airport

I am quite certain there will not be another international airport in Auckland in my lifetime, and probably not any lifetime. Auckland Airport is as natural a monopoly as you can get, so if airlines want to land in Auckland, they only have one choice. Since New Zealand’s economy is highly dependent on tourism, you can bet the government will take care of them in any time of need. Auckland Airport does venture outside the airport business and invests in real estate projects too. I prefer monopolies to stick to the core business and pump out the dividends, but if you like the idea of some growth too, this might be your pick.

Port Of Tauranga

Port Of Tauranga is the point-of-transfer for things going in and out of the central North Island. Ports are natural monopolies and since New Zealand is a heavy exporter, ports will always have good business. Port Of Tauranga might not be the most exciting business but has been a solid performer on the NZX and is a consistent dividend payer.

Air New Zealand

After the demise of Ansett back when I was a child, New Zealand has had one airline. It has hardly been a smooth ride for Air NZ and as I write this, they’re still recovering from a boatload of debt and a Covid beating. Air New Zealand doesn’t have the pricing power of most monopolies – despite being the only airline based in New Zealand, it still has competition from Jetstar on domestic routes and multiple airlines on international routes. However, you can almost guarantee it’s not going anywhere no matter how bad things get – the government owns much of it and it’s our only airline.

NZX Limited

The NZX is another natural monopoly in New Zealand, again due to size. While it may make sense to have multiple stock exchanges in other countries such as the US, in New Zealand there is barely room for one. Therefore if you want to list your company in New Zealand, you only have one choice. NZX also has a monopoly on exchange-traded funds in New Zealand through its Smartshares business. While a competitor could enter this market at any time, for now the entire ETF business in New Zealand belongs to them.

Chorus

Chorus was one of the entities created when Telecom was split up in 2011 (the other company formed from the split was Spark). Chorus owns almost all the telephone lines in New Zealand and built most of the country’s fibre network. The reason you might not have heard of Chorus is because they don’t sell directly to customers, instead, they sell wholesale internet services to retailers such as Spark, Vodafone, Sky etc, who then sell it to you. Chorus is a powerful monopoly in New Zealand because anyone who uses the internet (basically everyone) directly or indirectly pays Chorus money.

NZME

NZ Media and Entertainment Group owns 22 newspapers across New Zealand, including the NZ Herald. While NZ Herald isn’t a monopoly, many regional newspapers are natural monopolies or duopolies, as once a newspaper dominates a region it makes very little sense for a smaller paper to come and compete (how many people want to buy two newspapers each day?). In fact, regional newspapers were once one of Warren Buffett’s favourite investments before the industry went digital. NZME also own various radio stations, including ZM and Newstalk ZB.

Should you invest in NZ monopolies?

Remember – just because monopolies are guaranteed to make money, doesn’t mean they’re guaranteed to spend it wisely.

For example, Auckland Airport might make a boatload of money from landing fees and rent and so on, but then might waste it all on developing some shopping mall that goes belly up, or might pay its CEO a zillion dollars and end up with nothing for shareholders.

A good example is Skycity, which makes close to $1b in profit from its gaming business but has tied up a lot of money building its new convention centre which has had setback after setback (if Skycity was allowed to divest all its other businesses and simply run its casinos and pump out dividends, it would probably be the biggest position in my portfolio).

While I think all of the businesses above have the potential to be great investments, I currently own only one (Sky TV).

In my opinion, monopolies are a great investment when:

• They have an exceptional CEO who understands the business well.
• They stick to their core business rather than expanding into other (non-monopoly) activities.
• They pay a generous dividend, preferably close to 100% of their free cash flow.
• They are a natural monopoly.

As always – it’s up to you to do your homework and decide which might be a great investment for you. But in New Zealand, monopolies are a great place to start your search.

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