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Would you like a chance to pay off your mortgage immediately after borrowing the money? Apply to Halifax bank before the year-end, complete by 31 March, and you go into a draw. Three winners will have their loan (up to £300,000) paid off.

Perhaps you prefer a cut-price sofa? M&S is offering 30 per cent off furniture. Leeds Building Society is waiving interest payments for the early months of the mortgage. Nationwide Building Society will advance £500,000 to those with a 5 per cent deposit. Marsden will waive legal and valuation fees.

Sainsbury’s Bank is offering a five year fix at 1.94 per cent, less than 1 per cent more than the UK government is paying for five year money. All this activity reflects the desperate state of the mortgage market, as lenders struggle to find borrowers, almost any borrowers, to try and reach their targets. Even though the money is being flung at them, the number of home mover mortgages is falling, by 8.6 per cent year-on-year in September.

Does any of this sound distantly familiar? We have not yet approached the 120 per cent mortgage that helped do for Northern Rock, but advances on these terms will only work for the lender if everything goes swimmingly. There can be almost no bad debts, no negative equity and no significant fall in house prices.

Never mind that in central London, which has always been the lead indicator in the past, they are already down by a fifth from the peak. Never mind, too, that prices for other types of property are looking distinctly rickety, after write-downs from Landsecs and British Land this week.

It’s different this time. It always is. But here’s a curiosity. The big UK banks seem to be bursting with financial health, boasting rising reserve ratios and increasing dividends. Yet shares in Lloyds Banking, owner of the Halifax, are cheaper today than they were eight years ago, when they first recovered from the crash.

The bankers say they have learnt the lessons from that gruesome episode. Their lending criteria are supposedly more sophisticated than simply assuming property prices always rise. The market is saying that it doesn’t believe them.

First earn the dividend

The interim statement from Vodafone runs to 61 pages, including six (count ’em) “alternative performance measures”, but one short sentence triggered a 10 per cent jump in the company’s depressed share price. Voda’s new boss is holding the dividend at 15.07 euro cents, with an aspiration to raise it.

This really does look like cart-before-the-horse. The “basic earnings per share” for the latest six months add up to a loss of 29c per share, and even the “adjusted” version only produces 3.56c. Sustainable dividends flow from cash that is not needed for the health of the business. Payouts that are not earned are merely thinly disguised repayments of capital which weaken the balance sheet.

It may be that Nick Read can weld Vodafone’s sprawling empire together. From his experience as the company’s CFO, he should at least know his way round the 61 pages, but given the company’s history of profitless expansion and monster dealmaking, the size of the debt mountain and the need for continuing investment in the telephony business, this dividend does not look sustainable. Which is why the shares, even after this week’s recovery to 157p, still yield over 8 per cent.

Bookies win again

It was less the climbdown on fixed-odds betting terminals that surprised last week, than the cloth-eared proposal in the Budget to allow the £100 limit to remain until next autumn. You have to wonder what, if any, thought processes produced such a self-evidently stupid decision inside the UK Treasury. The gambling industry had effectively admitted defeat, after its own Project Fear (of massive job losses) had failed to shift the public resentment at the damage these fruit machines can do.

It took a ministerial resignation (rather overshadowed by subsequent events) for sense to prevail. It’s also a silver lining for GVC, the owner of Ladbrokes and Coral. It had promised a £700m payday for the former shareholders if the cut in the maximum stake had been postponed to October. It proves once again that the bookies always win.

This is my FT column from Saturday

 

 

 

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Another nail for the nuclear power coffin this week, as Toshiba gave up the unequal struggle to build a new station in Cumbria. It cannot even give its interest in the project away, so financially toxic is the business of building them.

The defeat will give the UK government an opportunity to make another wrong decision on nuclear power, and step in. This is an industry that for decades has been a billion-pound version of the roulette player’s telegram: “system working well, please send more money.”

On becoming prime minister, Theresa May was poised to stop this sequence, but then let Hinkley Point go ahead, on terms which saddle consumers with expensive electricity for decades to come. Despite this guarantee, the contractor EDF had to be rescued by the French government, and has yet to make its design work. The plant in Normandy is so late and over budget that construction of more them is now in serious doubt.

Nuclear power stations are a race between improving technology and ever more demanding health’n’safety rules. The industry’s fine record on safety has not overcome public superstition, and the experience of EDF suggests that the rules are winning.

The danger now is that in addition to its status as a £20bn white elephant, Hinkley Point may be the product of an obsolete technology. It is not too late to stop it, and EDF might even thank us if we did.

Car crash

They were whistling to stay cheerful at the Society of Motor Manufacturers this week. Look at the boom in electric cars! See how the fall in registrations is so much less than earlier in the year!  Never mind that the UK government’s war on diesel is devastating sales of what, we were told a few short years ago, was the most responsible form of locomotion.

That was then, this is now, and saving carbon dioxide emissions is deemed less important than cutting particulates, so local authorities are hiking the cost of diesel parking permits, and the motor trade is being forced into a gut-wrenching U-turn.

Even the above-average car salesman could be forgiven for feeling confused. The surge in electric sales may owe as much to beating the cut in government subsidy as to any real enthusiasm for them, since diesels which comply with the latest EU emissions rules are at least as green as an electric car. Oh, and then the prime minister goes and freezes the duty on road fuel.

Confusion might help explain why the distributors are so unloved, selling on around eight times earnings. The low ratings suggest that something more fundemental than government fiddling with the rules is going on. A shiny new motor used to be a near-universal aspiration, but the twenty-something generation is falling out of love with the car. Today’s young city-dweller may not even bother to pass the driving test, especially if that makes him the “designated driver” for his mates.

With Uber and its lookalikes at the end of your mobile, car-sharing and clever new forms of short-term rental becoming increasingly commonplace, it makes little sense to pay for a pile of gently rotting metal that you hardly dare use for fear of losing your precious parking place.

If this is ominous for the distributors, it is toxic for the manufacturers. They must bear the vast cost of developing electric vehicles just as the world may be approaching peak car. Even BMW, the car company that others want to emulate, this week reported static sales and halved margins in its latest quarter, as development costs weighed on profits. It’s not an industry for the thoughtful investor.

Life of Brian

And a warm welcome, please, for Brian McArthur-Muscroft, as he steps up to become CFO of Micro Focus International. He joins at a tense time for this software business, whose shares have halved this year. Micro Focus is the current owner of what used to be Autonomy, an $8.8bn business which none of us can understand, and which trails law suits.Here’s what passes for good news this week: “Constant currency revenue will be around the better end of the guidance of -6% to -9% for the 12 months to 31 October 2018.” Best of luck, Brian.

It was a bumper week for big oil. Buoyed by the rise in the crude price this year, the cash is pouring in. Both BP and Royal Dutch Shell are reaping the benefits of past cost cuts, just when their product is fetching twice what it did when cuts were imperative.

Their results show just how resilient these companies are: BP’s brush with financial disaster in the Gulf of Mexico barely warrants a mention, and the company can afford to pay cash for BHP’s $10bn shale interests. Shell’s takeover of BG, which looked so expensive at the time, has turned out to be pretty good value.

BP raised its dividend, while Shell restarted its buy-back programme. Considering the pressure on Shell never to cut the divi, it seems the directors believe the payouts are sustainable for as far ahead as they can see.

Ah yes, “sustainable”. Such a tricky word in the context of oil, the fuel which we love to hate, and which a vociferous minority would like to see left in the ground. Both BP and Shell are paying close attention to a bizarre court case in New York, where the State Attorney General is prosecuting Exxon for supposedly keeping two sets of books.

This has nothing to do with the old Italian tradition of one set for real and one for the taxman. Rather, the suit alleges that Exxon secretly believes the threat from climate change to its business model is much worse than it is letting on, and is thus misleading investors.

The prosecution case requires a willing suspension of disbelief. It focuses on “proxy costs”, a hypothetical tax that might be imposed on oil, one day. Neither the Attorney General nor Exxon has a clue of how much or when, or even whether this might happen. The suit sounds like nonsense, but defendants underestimate the imagination and ingenuity of American lawyers at their peril.

Meanwhile, both shares return 5.8 per cent from selling a product which will profitably power the world for decades to come. These payouts look a lot more sustainable than the Attorney General’s strange case.

No KIDding

Did you read your Key Information Document before investing in your Packaged Retail and Insurance-Based Investment Product? The brainchild of the European Commission, the KID provides a simple snapshot for every pooled fund, what you’re buying, and an indication of what you might get back.

The boffins at Visible Thread have devised a computer-driven methodology to measure KIDs’ clarity, and have not found much. Riddled with jargon, complex sentences and passive verbs, they conclude that 97.5 per cent of the 200 documents they studied are inaccessible to 61 per cent of the population. The worst 10 are only marginally easier to read than the Harvard Business Review.

The good news, as Visible Thread do not report, is that the 61 per cent are the lucky ones. The KID for Scottish Mortgage, the UK’s biggest investment trust, projects likely returns over five years. At worst, in a “stress scenario” it says your annual return could be minus 20 per cent a year. At best, in a “favourable” scenario, you could make a compound annual return of 40 per cent. Scottish Mortgage warrants a four on the risk scale of 1 to 7.

These are fantasy figures, and do not reflect the views of the trust management. They are obliged to put the past returns into a formula and publish what comes out. The results are highly misleading to a normal investor, but fortunately, he won’t understand them.

Rather than rewrite the KIDs in better English, much better to follow the advice to potential investors from the Association of Investment Companies: “Burn before reading.”

Reality check

If you want to buy a shoebox with a view (£1.8m) in Centrepoint, once London’s most notorious office block, do not contact CBRE or Knight Frank. Only half the flats have sold, so the selling agents have been “disinstructed” by the developers Almacantar. Chief executive Mike Hussey told Estates Gazette that offers currently being received are “detached from reality”.

London is awash with luxury flats at yesterday’s prices. The history of Centrepoint, which remained an empty office block for years while owner Harry Hyams waited for the right tenant, might serve as a reality check for Mr Hussey.

This is my FT column from Saturday

You decide that lending for property development is a good idea. So you join about 4,999 others, who between you advance £8.2m, not directly to a developer with a bankable track record (he’d go to the bank, which would be cheaper) but to a series of offshore companies linked to a family trust in the British Virgin Islands. The money will be “mainly” used to develop a residential project in Marylebone, west London.

What could possibly go wrong? Oh, and the peer-to-peer intermediary is called trendy “Lendy”, and advertises returns of up to 12 per cent to lenders. It’s hard to count all the red flags in this little saga, but here’s the twist. The borrower claims that it has not had the money it is contracted to receive, and is contemplating suing poor Lendy. The company has told its regulator it has a problem. Lendy’s lenders are right to be apprehensive.

These are early chapters in this unfortunate story, but already some things stand out. Firstly, the complexity of the borrower’s set-up does not inspire confidence, no matter how attractive the development may have looked on paper. Any machine where the money goes round and round and comes out close to where it started needs a convincing explanation.

Secondly, the enthusiasm of the lenders betrays British investors’ near-obsession with property, viewed as an asset class which cannot fall in value. As every pooled fund is obliged to emphasise, past performance is no guide to the future. It may be that the long bull market in residential property which has taken prices of, say, developments in Marylebone beyond the reach of almost everyone, is coming to an end.

Finally, Lendy’s woes illustrate the pitfalls of peer-to-peer lending, with the promise of above-market returns. Money may not earn much in the bank, but that is not solely because banks are venal, greedy organisations. If a development in Marylebone goes sour, it’s the bank that takes the hit, not you.

Roll up for Staley vs. Bramson

They could sell tickets for the show. After rejecting 11 offers (count ’em) to meet from Barclays’ CEO Jes Staley, Edward Bramson has deigned to find a gap in his crowded diary in two weeks’ time. Mr Bramson speaks for over 5 per cent of the bank’s shares (his Sherborne vehicle actually owns only a fraction of that) and is widely believed to want Barclays to scale down its investment banking, if not to get out altogether.

This week Mr Staley delivered what passes for good news at this big, battered bank. It is actually making money in markets. It has done before, in between poor years and blood-letting at the top. In 32 years it has had eight chairmen, nine chief executives, 12 deputy chairmen, and more non-execs than the average teller could count.

It’s different this time, of course. By Barclays’ standards, the current three-year partnership of chairman John McFarlane and CEO Jess Staley is a model of stability, so sure enough, it won’t last, and Mr Bramson wants a say in Mr McFarlane’s successor. His timing could have been better, and few other major shareholders would agree to bear the financial pain of exiting investment banking just when it might start to pay off.

Barclays has paid £37bn in litigation and conduct charges, costs, taxes and write-downs in the last six years, and with the shares selling at two-thirds book value and a price they first hit in 1996, the future must surely be better than the past. Another upheaval is about the last thing this bank needs.

It’s designed to confuse

We have long suspected that the average remuneration report, with pages detailing the raft of incentives thought necessary to get the company’s top executives out of bed, was designed to be incomprehensible to outsiders. Now it appears that in the unfortunate case of Patisserie Valerie, it was incomprehensible to the board and the auditors as well.

Nobody spotted that the two senior executives had been granted twice as many share options as the accounts admitted. If anything positive is to come out of this sticky mess, how about shareholder pressure for remuneration reports we can understand?

This is my FT column from Saturday

 

The Unilever cod memo. It was a draft, and not for publication!

Well, they can’t say they were not warned. In his first test at the Competition and Markets Authority, Andrew Tyrie is throwing the book at the proposed merger of J Sainsbury and Asda.

From suppliers to shoppers, local to national, innovators and competitors, the CMA will be turning over stones. It has already found 463 locations “where there could be an issue”. The arguments over current market share have been joined, and Shore Capital’s veteran analyst Clive Black sees “a minefield of legalese and pseudo-academic analysis” ahead.

This promises to be an exhaustive and exhausting process, and will not be quick. Yet in essence the question is a simple one: are Britain’s second and third largest grocery businesses too feeble on their own to live with Aldi and Lidl?

At first sight the answer seems self-evident. Both have larger market shares than either of the discounters, which should offer sufficient scale to keep them at bay. Both have established stores, while the discounters have to find locations. Ah, but not all the property is in the right place or the right size, and besides, Lildi’s UK operations are little more than cat’s-paws, and they use their continental muscle to scratch our supermarkets.

The merger advocates have already played their strongest card, promising wonderful savings for Sainsda shoppers, thanks to scale and improved distribution efficiency. The CMA might consider this card a variant on the Find the Lady conjuring trick, and ask for previous examples where the consumer has actually benefitted from mega-mergers.

While nobody doubts that grocery is competitive, in such conditions everybody charges what the market will bear. And the idea that suppliers would welcome having to deal with fewer buyers is risible. The bigger ones are quite ugly enough to take care of themselves, while the smaller ones would find themselves in an even tighter squeeze than they are today.

The threat from the discounters, and the UK shopper’s burgeoning affair with the internet, are real enough, even before Amazon arrives as a serious force in grocery, as everybody expects. Yet history shows that defensive mergers like this one do not deal with fundemental problems of businesses under threat.

If the CMA’s proposed remedies effectively make the deal unviable, as is more than likely, the pair will have to find a more imaginative route to survival, rather than behaving like a pair of drunks propping each other up.

Boards provide, markets decide

If they were shedding crocodile tears at Unilever House at the prospect of having to stay in London rather than going to Rotterdam, the directors were not showing it this week. The third-quarter figures reinforce the picture of steady progress we have come to expect, and nary a mention of that little local difficulty with the vote.

Humiliated the directors may have been, but they are not sulking, and the good housekeeping elements of the “simplification” plan go ahead. Thus the anomalous preference shares are cancelled, the Stichting trust office closes, and the directors will face annual votes for re-election.

Whether this is enough to save CEO Paul Polman from an early departure remains to be seen, but in any case, the boards (NV and plc, with identical membership)  could do with a strategic review.

Of the 13 directors, only CFO Graeme Pitkethly and non-exec John Rishton (ex-Rolls-Royce) are British. The line-up is splendidly international, as befits such a business, but had there been at least one director with some understanding of UK markets, the whole sorry saga of the proposed flit to The Netherlands could have been avoided.

Feelgood factor

Never mind the misery at Standard Life Aberdeen, highlighted here last week, holders who have seen their shares plunge from 420p to 271p since last year’s ‘orrible merger will be delighted to learn that they are supporting the first Green GB week (do keep up).

All SLA’s UK property is to be 100 per cent green-powered by 2020, and it “supports the Transition Pathway Initiative which assesses companies’ readiness for the transition to a low-carbon economy and is aligning with the requirements of the Taskforce on Climate-related Financial Disclosures.” That should make the poor  shareholders green about the gills.
This is my FT column from Saturday

A memo for the board of Unilever dated 14 March 2018 has just come into my possession*

 

PRIVATE AND CONFIDENTIAL

From Chief Financial Officer

Re: share unification

Our “Building the Unilever of the Future” announcement will be made tomorrow. We emphasise a simpler, more agile and focussed company, our corporate governance and the importance of our businesses in Britain. The real news is far down the press release, but I doubt whether our proposal to become a wholly Dutch company will be viewed as merely a technicality.

I foresee significant opposition ahead of the meeting to approve unification of our two share classes, so before the documentation is published, I invite the board to consider an alternative which would avoid the difficulties.

We will argue with FTSE Russell that New Unilever NV should be retained in the UK’s 100 share index, but since it breaks the rules, it seems highly unlikely that this will do more than buy us some time to blunt any criticism.

That there will be criticism, I have little doubt. We have received some assurance from the Dutch government that the current withholding tax on dividends paid to foreign holders will be scrapped, but there will be opposition, and the legislation may not pass.

We cannot give holders of plc shares a categorical assurance about the taxation of future dividend payments. It is clear that some holders of plc shares may be disadvantaged. Unilever is a core holding in any UK model portfolio, and those funds whose mandates are exclusively or predominantly UK shares will be unable to hold New Unilever, and may be forced sellers.

Individual holders will be resentful, but can be safely ignored. The total of their holdings directly on the register is too small to make a difference. Many, if not most, private individuals hold their shares through nominees. The biggest of these (eg Hargreaves Lansdown, Rathbone, AJ Bell) each administer 1 or 2 per cent of plc shares, but they will only react if enough of their clients complain, and many individuals will not understand what is at stake here.

We can be confident that the international investment houses will vote our way, since many of them view the UK and Europe as a single zone anyway, and will welcome the simplification into a single class of share. Between now and October I shall be emphasising to them the cost savings that unification will bring.

Others may be concerned at the logic of leaving London, a deep pool of capital, for the comparative backwater of The Netherlands. It may also be seen as a power grab by the Dutch side of an Anglo-Dutch company after the shock of last year’s unwanted bid approach. As you know, Dutch rules make hostile takeovers difficult.

Some may see the move as a response to Brexit, or as a petulant reaction to the frosty response accorded to the CEO from Downing Street recently. We can deny this. We will emphasise that 55 per cent of the trade in Unilever shares is in NV, but not that more of this trade takes place in London.

Nevertheless, we should not assume that the proposal will pass. It requires a special resolution, which needs a 75 per cent majority of votes cast. If a few of our biggest shareholders were to speak out against the plan, the pressure on private client stockbrokers and the operators of retail platforms might be enough to force them to vote their customers’ shares.

Our difficulty is that there is no face-saving tweak which we can offer for wavering shareholders. As the board knows, this is very much a binary issue, and once the documents are published, it becomes very difficult to back down. If the proposal fails to pass, the CEO’s retirement next year will be blighted, regardless of the financial performance of the business.

The alternative that I mentioned at the start of this memo is this: Royal Dutch Shell has its head office in The Netherlands and is incorporated in London. It thus qualifies for inclusion in the FTSE100 index. To follow its example would involve a certain loss of face for our board, but it could truly be described as a technical change, and would be far less damaging than the real prospect of losing the vote.

Graeme Pitkethly

*as if