You can’t accuse those remuneration consultants of lacking imagination. As one way of shovelling more riches to their clients attracts too much attention, they find another one. The general tactic is to produce an impenetrable (20 pages, minimum)  remuneration report to be signed off by some docile rem com chair, to justify rewards, whether earned or not.

A quiet abuse was exposed last week over pension contributions. These sound innocuous enough, as we are constantly being badgered to save more. The tax relief on contributions is designed to encourage saving small amounts over a long career, thus avoiding becoming a burden on the state in our old age.

The consultants have hi-jacked this admirable idea into a less obvious way of steering more to senior executives. At their rates of pay, contributions are way beyond any tax relief, and however prettily dressed, they are cash payments. The Investment Association, that trade union for fund managers, has produced a fine figleaf, urging that the CEO should not see a bigger percentage of salary going into his pension than the average employee in his company, which quietly ignores the vast gulf between the salaries in the first place.

Yet even this generous guideline is met by only 15 per cent of FTSE100 companies. In theory, shareholders can vote down remuneration reports. In practice, it is almost unknown, because those running the funds control the votes – even though they are not the beneficial owners – and would rather not turn the spotlight on their own packages.

When so much is shared between so few, and often for the most spurious of reasons, it is hardly surprising that the politics of envy gets traction among the voters. Now the ruse has been exposed, we can expect increasing compliance with the pension guidelines from CEOs. The consultants, meanwhile, are dreaming up the next way of keeping the cash coming. Green targets, anyone?

Try this for size

Exciting times at Galliford Try. Last month the shares plunged after a profit warning which blamed a financial car crash on the new Forth road bridge, and following extensive damage from the collapse of Carillion, co-contractors on the Aberdeen by-pass.

Graham Prothero, the freshly-promoted CEO, had quickly decided that large-scale contracting is too dangerous. This week he announced that the plan to”resize” the business was going fine, and the analysts’ forecasts, themselves resized after the warning, for the year ending next month are about right.

Galliford is now going to stick to housebulding and regeneration projects, and according to Peel Hunt, they are the wrong price. At 567p, they cost just four times the broker’s estimate of this year’s earnings and yield 14.6 per cent on last year’s dividend.

Mr Prothero has been careful to say nothing about this year’s payout, and a double-digit yield is not a good look. Resizing it looks almost inevitable, and when words and figures do not agree, it is the figures which usually tell the truth.

The new postal order

The posties could set an incoming Corbyn administration a knotty problem, since Labour has set its heart on ownership of the commanding heights of the Royal Mail. Should the government offer the same 330p a share that hapless Vince Cable sold it for, there would be little opposition from the ravenous beasts in the capital markets, who would view it as a 50 per cent premium to the “undisturbed” price.

The postal workers would not be amused by anything less, having seen the shares they were given at privatisation rise to 630p, before plunging to today’s 222p. This week’s dividend cut is particularly unwelcome, since the money saved is to be used to modernise the business, at the expense of their jobs. Relations between them and the management have not always been harmonious in the past.

Then there is the little matter of the impact on the other re-nationalisations, where the threat is to pay much less than the current market prices. Given a sufficient majority, a Labour administration could do more or less what it likes, but judicial reviews would tie it up in legal knots, and the process can last longer than the administration.

This is my FT column from Saturday

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Britain’s National Infrastructure Commission wants much more money to be spent on national infrastructure. Its chairman, Sir John Armitt, CBE, FR Eng, FICE, FCGI, has written to the chancellor in robust terms, complaining about the gap between pledges to do something and anything actually getting done.

Last December, the government announced £413bn of road, rail and energy projects. Sir John reckons that just £30bn-worth has a “realistic chance” of happening. As he might have put it, the road to hell is not even paved with good intentions, since the contracts for the paving are never actually let.

His remedy is a government commitment of 1.2 per cent of national output every year, ring-fenced, to allow the industry to plan with confidence, along with the unexpected bonus of seeing a few more projects escape from the drawing board.

This is all very fine, but like December’s magnificent wish list, it is a fantasy. Big projects are there to be cut in moments of crisis, because they can be, and no chancellor will close his emergency escape route. Besides, we seem incapable of choosing big projects that offer value for money. The runaway financial train that is Hinkley Point nuclear power station is unfortunately too far down the tracks to stop now, while the socially and environmentally radioactive HS2 received yet another mauling this week.

A report from the Lords’ Economic Affairs committee can now be added to the pile of previous analyses, all concluding that HS2 is a waste of money. This one admits that we do not even have any idea of how much money, as the costs are out of control before a single rail has been laid. Meanwhile, the growth in rail traffic has stalled. Seats are generally available on routes to the north west, undermining the last refuge argument that the extra capacity of a new line is desperately needed.

The real mystery is how this project defies all attempts to stop it. Like Hinkley Point, HS2 is consuming scarce resources which would be better spent on the long list of many smaller, sensible schemes gathering dust at the Department for Transport.

Liz Truss, today’s number two at the treasury, seems to get this, extolling the virtues of more buses and better trains outside London at an FT conference this week: “Leeds is the largest city in Europe without its own mass transit network. Birmingham is 33 per cent less productive than a city of its size would be in France.”

The Armitt commission is too in love with construction to recommend scrapping HS2, although it does put the price of decent northern transport at £43bn, less than half the likely cost of HS2 if it ever gets completed, and providing a genuine economic boost where it is most needed.

Ms Truss is almost high enough in the government to stop the runaway train, and switch to Armitt instead. Either that, or the Conservatives risk seeing a popular, money-saving and sensible policy appearing in Labour’s manifesto.

Ditch those doomed dividends

Reality is slowly creeping up on the big beasts with doomed dividends, but it is a slow and painful process. Vodafone had been failing to earn a sustainable payout for years before finally grasping the nettle this week. Centrica has again paid out more than it can afford, while effectively signalling another cut in its attempt to avoid an existential crisis.

Philip Jansen, BT’s new CEO, apparently believes he can pay for fibre, footie and everything else by borrowing and selling off bits of the business, but the yield on his maintained dividend of 7.5 per cent says it can’t be done. Holding the payment is a missed open goal for a new player. Should he be forced to cut next year, he will carry the blame.

The big dividend payers which allow income funds to flaunt fat yields to investors are mostly being found out. Companies further down the FTSE scale, like Standard Life Aberdeen, Aviva, GlaxoSmithKline and J Sainsbury are reduced to hoping that something will turn up to allow the payouts to continue.

The income funds are increasingly dependent on oil, tobacco and housebuilders, where the yields are high and considered sustainable. Unfortunately, these unfashionable industries may not be where today’s woke investor should really admit to investing her money.

This is my FT column from Saturday

 

Who would have thought that giving money away was so hard? The oddly-named Banking Competition Remedies has £775m to spend on banking good causes, if that is not an oxymoron, but has managed to throw the biggest bung in quite the wrong direction.

BCR is crystallised euro-fudge, the result of the failure of Royal Bank of Scotland to divest Williams & Glyn’s after the state rescue of the bank. The European Commission ruled that RBS (majority holder, HM Government) should provide the cash to secondary, sorry, challenger banks to help them grow faster and become more than an irritant in the side of the big players.

Even if anyone thought this a good idea at the time, the trio at the top of BCR under Godfrey Cromwell stumbled badly with the first award. In January, Metro Bank had revealed that the regulator had discovered some loans that were riskier than the bank had previously admitted.  The share price dropped by a third in a day. Nevertheless, Cromwell & Co decided that this little local difficulty would not damage Metro’s ambitious plans to go forth and challenge, and awarded the bank £120m.

The money would allow Metro “to radically transform the UK SME banking experience”, paying for “stores” in Manchester, Liverpool, Leeds and Sheffield. We were promised “initiatives to introduce a range of game-changing digital capabilities to help SMEs thrive.”

Since then, Metro has discovered its own radically transformed SME banking experience. The terms for the £350m “equity raise” that followed news of the award are yet to appear, the shares have carried on falling and the price is now threatening savage dilution for shareholders. It is not even clear whether a rights issue is still possible on anything other than rescue terms.

From £22 ahead of the loans shocker, the shares are 540p, valuing the bank at under £550m. The handsome premium to asset value which challenger banks usually enjoy has evaporated, and the dream of any sort of expansion is rapidly fading.

Metro’s business model, opening (expensive) branches while everyone else is closing them, relies on rapidly increasing customer deposits, plus a sideline in safe deposit boxes, an activity where money laundering rules have scared off much of the competition.

This model required a willing suspension of disbelief at BCR. It should surely have been punctured by the loans admission, but Lord Cromwell and his team ignored the flapping red flag of the share price plunge, instead relying on assurances from Metro’s executives. Before they give away more of what is, in effect, taxpayers’ money, they need to develop rather more market nous to show they are up to challenging the challengers.

Electric cars run out of juice

In the noise surrounding a Swedish schoolgirl, and the apocalyptic climate warnings from John Selwyn Gummer, a still, small statistic slipped out this week: we don’t like electric cars. Last month sales of plug-in hybrids plunged by 34 per cent. Sales of all-electric cars jumped by a half, but the numbers are so small (less than 1 per cent of registrations) as to be meaningless.

Discount the Tesla show-offs and the simply curious, and it is clear that motorists have a much more jaundiced view of these vehicles than the save-the-planet lobby would like us to think. Government propaganda has effectively demonised diesel cars only a few short years after we had been urged to buy them to save energy, but once the subsidies for electric cars are slashed, they look pretty unappealing as an alternative.

It is little exaggeration to say that the British motor trade is in crisis. Successive policy changes, culminating in the virtue-signalling proposal to ban sales of new petrol and diesel cars by 2040, have undermined a rare industrial success story.

There is no sign, for example, of any ideas for replacing the £38bn a year motorists currently pay in fuel duty and tax. Then there is the blithe assumption that other technologies will somehow provide painless substitutes for fossil fuels.

As with the Climate Change Act before it, setting a far-away date to implement expensive and disruptive policies allows today’s politicians to feel good about themselves, while the task of dealing with reality rather than a zero-carbon fantasy is left to the next generation.

This is my FT column from Saturday. Metro Bank shares are now £5.

Mike Coupe has come out fighting, following the collapse of his grand plan to merge Sainsburys with Asda. The trading results were the usual mishmash of “business performance” and “statutory reporting”, which allowed him to describe a 30 per cent fall in post-tax profits as a 7.8 per cent increase in “underlying pre-tax profit”.

The magic word here is “underlying”, definitely not to be contrasted with lying, which allows all sorts of nasty costs to be brushed aside. Among those at Sainsburys is the £46m wasted on the ‘orrible merger. Mr Coupe dismissed this in the context of the £12bn deal, but it is equivalent to a fifth of last year’s dividend payments, or the margin the company earned on £2.3bn of sales.

Investment bankers routinely complain that if a deal does not happen, they have slaved away and got nothing. Sainsburys’ bill rather gives the lie to this assertion. The money has gone to bankers, lawyers and advisers, and it looks uncomfortably like another example of the City’s ability to tax commerce.  Rather than serving the needs of the customers, the big financial players are imposing their informal tariff on their users.

This is at its most blatant in cash-raising exercises (see below) but Sainsburys’ experience is a symptom of how far power has shifted from the users of the capital markets to those providing the capital.  So far has this moved that it is hard to see which is the tail, and which is the dog, but as the (mostly poorly-paid) staff in Sainsburys supermarkets try to generate sales to pay the fees, they cannot be in much doubt.

Sirius: conveyor of bad news

A mile-long conveyor belt is quite a piece of engineering. It must be stiff enough not to stretch so one end gets going well before the other starts, but flexible enough to run over return rollers at each end. Britain’s biggest mining project proposes a 23-mile underground conveyor, or cascade of conveyors, to transport bulk fertiliser under the Yorkshire moors.

It is a magnificent fantasy, being brought to life by Sirius Minerals and its CEO Chris Fraser. He has revealed a head-bangingly complex £3.8bn financing package, courtesy of JP Morgan, to get the mine’s tunnel bored and, maybe, to start actual production.

This is a remarkable achievement. Banks like JP Morgan are coldly commercial. Even given the fees (£16m for a net £311m of shares) and the prospect of profitably trading the different classes of debt, writing swaps or options, and generally exploiting complexity, this is a top line endorsement. Unfortunately, it also means more pain for starry-eyed Sirius shareholders. At 16.8p, the price is at a three-year low, and the new shares are issued at 15p.

There are parallels here with the channel tunnel project. The boring was supposed to be the hard part, but in the event it was comfortably achieved. The hard part turned out to be commissioning the line, where costs ran away, requiring a rescue package for Eurotunnel. A conveyor is hardly comparable to a passenger service, but 23 miles underground, what could possibly go wrong?

Retirement is just not simple

He’s having a laugh, right? Rodney Cook quit without warning last week as CEO of Just Group. He said he was off to plan his retirement, rather witty since the slogan for the company he headed reads “we help people achieve a better later life.”

Mr Cook’s later life will be better thanks to old incentives and six months’ pay, a leaving present from a grateful board, or what’s left of it after the finance director departed last October. He is unlikely to be a burden on the state, but is not as well off as he was. The latest accounts (for 2017) show him owning 2.9m shares, which at 64p are one-third of the price at which Permira floated the group five years ago.

Still, chin up. In March he was putting another annus horribilis behind him, telling us he “remained confident”. Only last month he was awarded a clutch of new share options, which will lapse. Now at 62 he’s off to plan his retirement. Just not with you, OK?

This is my FT column from Saturday

Is working for the Red Squirrel Survival Trust a useful qualification for joining the board of a £400bn fund manager? Well, not obviously, so try this: Is being the principal beneficiary of nearly half the voting shares in the £10bn company rather more helpful?

This week the shareholders in Schroders get the chance to debate these questions, which have divided the corporate governance policemen, with one (Glass Lewis) saying no, and another (Institutional Shareholder Services) seeing merit in squirrel survival. Or perhaps, seeing logic in having a member of a family with voting control on the board.

My father was a long-term holder of Schroders shares, and I have bought more since he died, but we are mere short-termists compared with the family. Leonie Schroder is the fifth generation since the company was founded in 1804, joining the board after her father Bruno died earlier this year.

But this is not how corporate governance is supposed to work.  Glass Lewis questions whether, “in representing her family interests, she has sufficient core industry or sector experience to effectively challenge management.” It is the classic one-size-fits-all recommendation from the box-tickers.

Never mind that Schroders’ management has made its governmentally-correct rivals at Standard Life Aberdeen and Janus Henderson look like amateurs, or that in an inspired decision, her father sold the firm’s core business of investment banking when it was worth something, rather than see it destroyed by the American giants.

Neither we nor Glass Lewis know whether Ms Schroder will effectively challenge the management, although a glace at the share register would concentrate their minds wonderfully in the event of a dispute. Like Associated British Foods with Primark or Daily Mail and General Trust with Euromoney, companies controlled by an engaged dynasty allow the board to take a genuine long view to nurture promising businesses.

The smart ones also know when to bring in outside talent. Ahead of the annual meeting of Schroders, both governance firms criticise the proposed £6.2m bonus for chief executive Peter Harrison. This has little prospect of being voted down, although it does indeed look pretty gross. Still, at least nobody can complain that all the rewards are being kept in the family.

Swing that axe, Liz!

Apparently HS2, the fastest white elephant on wheels, will generate £90bn in economic benefits, far outweighing the costs, across Britain, providing a significant boost to the country’s economy and its connectivity.

So says Darren Caplan, but he is chief executive of the Railway Industry Association, lobbying desperately to spare the project from the infrastructure review promised by Liz Truss for later this year. Should she survive as treasury chief secretary, it is hard to see a project more deserving of the chop than HS2.

Study after study has concluded that it is not worth building, even before calculating the misery of those living in its path. There are dozens of smaller rail projects which offer far better value and which could be completed for a fraction of the likely cost of HS2. The Department for Transport (pilloried as DaFT in Private Eye) may already be Whitehall’s worst; like the railways, it badly needs electrifying.

Now mind the store, Mike

Show me a good loser, and I’ll show you a loser, runs the old adage. Nobody could accuse Mike Coupe of being a good loser now that the Competition and Markets Authority have seen through his wheeze to solve Sainsbury’s chronic problems by merging with Asda.

His tone towards the CMA has been belligerent throughout. From demanding more time, to his savage response to the interim findings, he behaved as if he knew the rules better than the authority. However, his response to the final ruling to block the deal, that “the CMA is today effectively taking £1bn out of customers’ pockets” is as absurd as it is grandiloquent.

It would never have been possible to measure the price cuts due to the merger, and  the reaction of the share price, falling to a 26-year low, is hardly consistent with the loss of an extra £1bn for shoppers. Freed from the excitement and distraction of the deal, Mr Coupe has much to do, not least to prove he is a good loser after all.

This is my FT column from Saturday

You run a vast international business with enviable margins, wonderful cash flow and a powerful market position. Yet you can see the spectacular growth of the previous decade is not going to continue. What do you do?

The conventional answer is to use the cash to build new businesses to keep growing and you are, of course, Tim Cook. The iphone has changed the world, earning Apple money beyond the dreams of avarice, but it seems likely that the future will be less exciting than the past on the hardware front.

Most of us are conscious that our pocket rocket can already do far more than we are likely ever to want, and peak iphone may not be far away. Mr Cook’s answer is to plunge into the entertainment business, reinventing Apple tv and taking on the likes of Netflix. Yet even with Oprah and Harry to help, the impact on Apple’s vast earnings from its existing business will be modest, and as Sony so painfully discovered, entertainment is a very different industry.

Peak demand may also be on the horizon for oil, another world industry dominated by a few giants. All the majors are scrambling to reinvent themselves away from the core business that built them, but here again, the diversification record has been, well, mixed.

Shell has no more special expertise in selling domestic gas than does Apple in television. Both companies are big enough to slug their way to a decent market share by throwing money at it, and besides, look how forward-thinking and dynamic we are!

Nobody wants to work for a shrinking business, which is why diversification trumps returning capital to its owners, however expensive it turns out to be. They pay lip service to shareholder value, but ambitious executives put their own interests first.

 

There’s money in them audits

It sounds like the dullest possible investment opportunity you could imagine: the chance to buy shares in an audit company. This Cinderella corner of the accounting profession has been turned into a loss-leader for the burgeoning business of consultancy, a means to get through the door to allow the smoother, slicker partners to offer expensive comfort and advice.

The failure of Carillion exposed just how useless today’s audits have become. The auditor’s report drivels on interminably. Nobody knows what it is for, while company accounts often give three or four versions of profit. The Competition and Markets Authority is on the case, sort of, proposing more regulation, more responsibility for audit committees, more oversight, more everything.

Paul Boyle, who formerly headed the Financial Reporting Council, considers the CMA’s remedy for the crisis wrong on almost every count. He acknowledges that should one of the four big firms fail, the result would be calamitous, and in a paper for think-tank CSFI, he argues that auditing needs more capital, not more regulation.

Considering how little profit there is in auditing today, this seems counter-intuitive, but freed from the current requirement for control by accountants, the business could be quite attractive. Auditing is a statutory requirement, so there is a captive market. The reputational damage to an audit-based business of a client turning into another Interserve is a powerful incentive to do the job properly, even at the expense of the client’s executives’ bonuses.

The cost of auditing would rise, perhaps dramatically, but the quality would be much improved by introducing competition and markets. Perhaps there should be an authority that promotes both. Oh, wait a minute…

 

Not bad for a dying breed

The British pub is doomed, killed off by supermarket booze, the breathalyser, minimum wage, food hygiene fascism… The survivors will have converted into gastropubs or (of course) ‘Spoons. Well, maybe. So here is the City Pub group, a half-pint specialising in pubs in cities, which this week reported a 22 per cent rise in revenues.

It is replacing a 3 per cent of profits payment to staff with a bonus scheme based on their pub’s weekly sales. Wannabe investors can only gulp at a valuation of £143m, three times sales, or an intoxicating 36 times adjusted pre-tax profits with the shares at 235p. Should be easy to get a drink at the pubs, though.

This is my rather weak column from Saturday

 

 

 

Psst…wanna buy a nuclear sub, one careful owner, now surplus to requirements? Well, too bad, even though nuclear refers to the propulsion system rather than the armaments, and the UK Ministry of Defence has 20 of them in various stages of decay.

It is 24 years since the MoD pledged to scrap surplus boats “as soon as reasonably practicable” and, as the National Audit office has revealed, they are all still there, eating £12m each a year in storage, with the delay costing an extra £900m to date.

By the standards of the MoD’s usual fantasy financing, this is a third division problem. But one day, perhaps when the packed subs allow visitors to walk dryshod across Devonport dockyard, the boats will have to be properly dismantled, and Babcock International is the only organisation capable of doing it.

Babcock has scrapped an old boat of its own, now chairman Mike Turner is finally going. Having overseen an absurdly generous payoff to a former CEO, as well as the disgraceful bid defence of GKN a year ago, his departure after 20 years on the board is overdue.

The shares are back where they were when he took the chair a decade ago, as analysts worry whether Babcock has caught the creative accounting virus that has crippled other outsourcing businesses. The company says not, and now it has a new champion in the shape of Ruth Cairnie, a former Shell executive, to put up against the MoD.

At 506p Babcock shares yield 5.9 per cent after a small increase in the half-time dividend. That’s high enough to be attractive, but not so high as to ring alarm bells. If Ms Cairnie can charm the MoD and restore investor confidence, the shares’ long dive may be over.

No good deed left unpunished

Thames Water is a business we love to hate. The company has been stripped of the equity it inherited at privatisation, treated major pollution incidents as merely part of the cost of doing business, and lost more water in leaks than its domestic customers actually used. No wonder many customers quite like the idea of a Labour government taking back control.

It is a miserable backdrop for Thames’ chief executive, Steve Robertson. He inherited the result of cynical behaviour from Macquarie and the previous owners who took £1.16bn in dividends and added £6.6bn in debt over five years, while the infrastructure decayed. By the time the “Aussie squid” bank sold out, there was no money left to finance the Thames super-sewer.

Today’s owners, the Kuwaitis and non-UK pension funds, could be forgiven for suffering buyer’s remorse, even before the potential left-field problem of asbestos water pipes. Under pressure from the regulator, and as the scale of the infrastructure backlog emerged, they have been forced to consider Thames as a very long-term investment. They have taken no dividends for three years, and to make up for past misdemeanors, the regulator is screwing down the financial taps at the forthcoming pricing review.

Under chairman Jonson (“stop”) Cox, Ofwat might still do so. Its final decision is due in July, but Mr Robertson’s promises of good behaviour, (slightly) lower bills and greater efficiency have dramatically narrowed the gap between his proposals and Ofwat’s demands, to a bridgeable £900m.

Thames’ days as a rogue company are behind it. It seems to be striving to become a good corporate citizen, as if that would make any difference if Jeremy Corbyn comes to power.

 

LCF sinks FCA boss

The horror story that is London Capital & Finance, where it seems that four-fifths of savers’ money has been lost, has turned the spotlight onto the Financial Conduct Authority for missing the red flags before £237m had been extracted from innocent, if greedy, investors.

Had the FCA studied the 2016-17 accounts, when just £60m had been invested, it might have spotted that LCF was already technically insolvent and saved the latecomers’ pain. The inevitable prosecutions will not recover the money, and even if the perpetrators go to jail, the FCA will bear the public’s wrath. Its chief executive, Andrew Bailey, was a front runner to become Bank of England governor after Mark Carney departs. Not any more.

This is my FT column from Saturday