24 Dec 2015

This seems to be a time in which people have a touching faith in the idea that progress can be achieved through international negotiations. Certainly, the mutual back-slapping following the Conference Of Parties (COP21) in Paris implied that a new era of cooperation has arrived. COP21 had 25,000 official delegates and an estimated further 25,000 fellow travellers (doubtless all busily offsetting their air miles). The direct aim of this conference was to agree to a temperature target for the earth in the year 2100. With nearly 200 nations represented, it is understandable that everyone was pleased and relieved that everyone agreed that something had probably been achieved. The obvious problem is that in 85 years (2100) almost none of the 50,000 attendees will be alive. COP21 is a group-hug endorsement of the contemporary notion that everything that is hard to face now can be flipped into the future. The tendency to defer tough decisions is arguably human nature (though there must be some humans out there somewhere who prefer to face up to difficulties – where are they?) Certainly, putting off the evil hour has dominated central bank policy for nearly ten years to the point that markets were effectively begging Janet Yellen  to pull the trigger on the first rate rise of what might turn into the new current cycle. Avoiding short-term unpleasantness has resulted in a massive build-up in off-balance sheet liabilities for future UK taxpayers through an expensive policy known as PFI. It has allowed students to be obliged to fund their own education on penal terms, using teaser rates to distract attention from the financial burden that will dog them in years ahead. The probable widespread default that will hit the Student Loans Company will be underwritten by all taxpayers in the future. While much political capital is made out of trying to deny benefits to immigrants, nobody seems inclined to address the monumental unfunded liability that arises from the need to pay pensions to and healthcare costs for our dramatically aging population. We’re probably going to need a large number of working age, tax paying immigrants to help us out at some point. The inevitable car crash that will...

21 Sep 2015

Perhaps the most pertinent question for UK stock investors today is “can I trust those high dividend yields?” Glaxo has pre-announced that it will maintain its dividend at 80p per share this year and next year. That’s a yield of 6.2%. Royal Dutch appears to yield 7.5% on the basis of paying $1.88 (c.120p) also “guaranteed” for 2015 and 2016. If these companies can be relied on to continue these pay-outs, it matters little whether Janet Yellen dares to raise the federal funds rate from irrelevant to insignificant or indeed whether Mark Carney goes mad and does the same with the bank rate.  Here is what I previously wrote about the interpretation of high dividend yields. Shares that yield 5% The market does not like these companies. They are seen as unreliable. This may be because there are external threats that are beyond the power of management to prevent or mitigate or it may be that management is simply mistrusted. It might also be the case that they are mature businesses that are, rightly or wrongly, thought to be approaching the end of their life-cycle.   Shares that yield 6% The market does not trust the dividend. It expects it to be cut (or “rebased”, in modern corporate terminology). Naturally I agree with every word of this and everything that follows should be seen in the context of those comments. I will briefly discuss Glaxo and Royal Dutch before moving on to some humbler companies. There is a summary at the end. GLAXO           Price:  1296p                    Hoped for dividend:  80p                       Yield: 6.2% Glaxo is showing off by paying a bonus 20p in respect of Q4 (year-end March 2016). This seems to me an unnecessary answer to the sceptics who would anyway be confounded merely by flat progress. People dislike Big Pharma about as much as they dislike Big Tobacco and they both look like industries that spend a fortune on lobbying. Glaxo needs to generate $3.8bn of free cash flow to pay its 80p dividend without adding extra debt (nearer $5bn this year with the bonus). In 2014 it made free cash flow of $5.5bn; in the year to March 2015 free cash flow was...