5 Jun 2016

Back in November one of my first ever blogs was about M&S. The shares were trading at 389p and I wrote that only takeover interest could justify a higher price but I thought that the pension liabilities made that a very unlikely prospect. For reasons which were and remain unclear to me the shares touched 600p last year but M&S has not yet been taken over and they have now tumbled all the way back to 355p. A battered low-end competitor BHS has just been closed with 11,000 jobs lost and 164 stores closed. It is no surprise that it was the pension liabilities that provoked the final bullet to the head. In addition, Austen Reed is closing 120 outlets at the cost of 1000 jobs and Matalan is reportedly struggling under its debt burden. (Matalan’s founder loaded it with extra debt in order to pay himself a dividend – sound familiar?) A hard-headed analysis might suggest that the closure of a competitor is good news for the other clothing retailers but on 25 May M&S shares were hammered following publication of its 2015/16 results. Excluding last week’s ex-dividend adjustment they are down 17% (from 445p). For the nth year, M&S is having trouble with its Clothing business. The CEO was ridiculed for referring to the core customer as “Mrs M&S” though the results presentation offered the slightly surprising observation that 42% of its 32 million customers are men. I seriously doubt if there is any company on which more people have an opinion than M&S. There are millions of experts out there. I can read in the presentation what customers are complaining about. There is too much choice, too much fashion at the expense of style, too many sizes out of stock and not enough consistency about price and value. As someone burdened by little interest in shopping or retailing I must say that none of that looks impossible to fix. You can also shop at M&S online though I don’t know how well it works or whether that would appeal to the 78% of customers who are 35 or over (still reading the presentation). Following the rather negative publicity and the share...

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...

7 Jan 2014

The FTSE 100 rose by 4.4% in the quarter for a full year gain of 13.9%. The FTSE 250 (that’s companies from 101 to 350) performed twice as well in 2013, rising by 28.8%. There are never truly hard factual reasons why share prices move but it generally remains the case that smaller companies’ share prices are relative beneficiaries of improving confidence. Large blue chips do better when investors are seeking protection. It is also probably the case that smaller companies are less well known and consequently deliver more surprises. Note that in bad times they typically deliver more bad surprises which point takes us back to why large stocks do better when investors are nervous. It is reasonable to conclude that confidence improved in 2013. The mood implied by the yields offered by government bonds rose from clinically depressed to merely grumpy – in the case of the UK this was from 2.0% in January 2013 to 3.0% now. In the US the rise was slightly sharper, from 1.8% to 3.0%, but it was much the same story. The bond markets are suggesting that we are looking at a fairly gentle, low inflation recovery. Analysts sometimes name this “Goldilocks” (not too hot, not too cold) and it feels like a very comfortable investment environment. Comfort eventually causes complacency and this is exactly why it is wrong to commit one’s investment strategy to an opinion about the future, no matter how tempting. Investment is always about how probability is priced. Consensus rarely offers compelling value. I am pleased though not surprised to say that my satellite index of companies with female executives quite dramatically extended its outperformance against the FTSE 250. After the first nine months of 2013, the FTSE 250 was +25% but the 27 companies with female executives had risen by 35%. After the full twelve months, those numbers were +29% and +46% respectively. As for the shares that I recommended this year, in Q3 I wrote that I was surprised that Enterprise Inns rose by 40% in Q3. In Q4 it was much quieter, rising by 6.5%. I am not attracted by the value of the company now and I don’t...

5 Mar 2013

After the shock of the credit crunch, many companies are beginning to feel flush with cash again. Sadly, an unwelcome old habit is also making a re-appearance – buying back shares in an exercise falsely described as “returning cash (or value) to shareholders”. Here is an extract from the last annual report of an otherwise very sensible company, Morrison Supermarkets: We expect capital expenditure to be higher in 2012/13 as we continue to invest for future growth. £368m was invested into our equity retirement programme, and we are on track to meet our objective of returning £1bn to shareholders over the two years to March 2013, in addition to normal dividends. In 2012/13, Morrison generated £1209m of cash flow after tax. It invested £796m in capital expenditure and paid £301m in dividends for a total of £1097m which is just over 90% of cash flow: result, as Mr Micawber would say, happiness? Not quite. As the extract points out, the company also spent (or as it would say, “invested”) £368m buying back its own shares meaning, obviously, that it had to borrow to do so and total net indebtedness increased. So why do they do that? There are a number of possible reasons, most of which are negative for ordinary shareholders and some of which are outrageous. Managers of companies sometimes dislike building up excessive cash on their balance sheets. If they have run out of ideas to enhance the business by reinvesting that cash, they should presumably pay it back to the owners (aka the shareholders). The trouble with this is that many managers appear to think that a) paying a high dividend is an implicit admission that the company is ex-growth and b) the obligation to keep paying the dividend will become an inconvenience if the business performs less well in the future – executives know that dividend cuts often cost their own jobs, so why tempt fate? Yet, businesses that just sit on piles of cash can become takeover targets, particularly from private equity buyers who can effectively use the target’s cash to fund its own takeover. Once again, executives of acquired firms tend to lose their jobs. So, despite the...