Dividends

Dear Friend

I write on another ‘red’ day for the world markets. There aren’t any ‘particular’ reasons, in that the US Fed’s warning or the chancellors’ comments of ‘we are going into recession’ are unexpected by anyone. This is despite the media’s attempts to present the news as some new shock (if anything, so far I have been surprised the economic drop was so small for us). However, it is becoming wearing that so many stocks are moving by big gyrations so frequently – it may be fine for ‘day traders’ but not for those trying to eke-out some semblance of normality going forwards. Remember too that financial pundits sell the news. They know that bad news sells better but as I was reminded recently (and forgiveness to the few exceptions!), very few, including those which give ‘advice’, aren’t very wealthy – in other words, why do we give such great store of worth to their comments and opinions when they can’t even reflect that from their own personal financial decisions! Most are not qualified in the field either though relevance in the face of this storm is a moot point. (I shall probably now be excommunicated by a few but it is an interesting context and is the same, perhaps, as to why directors of firms so often don’t even have the confidence in their employers to have some shares in them!).

It is time again to not lose sight of the horizon. Even with the ‘economy’, did you know that at present the ‘State’ is contributing over half of all economic output as measured? In the UK we are a consumer nation and it was the case that consumer spending counted for over 60% of all economic output. That is down dramatically, as we know. However, it has not all stopped, even if many cooped-up individuals will find that their bank balances swell monthly as they are not spending on things they would have done normally. One-in-three/four jobs were State sponsored before the lock-down and their job security is unchanged. The working population counted for less than half of the total population and millions of pensioners with State pensions and occupational pension schemes are unaffected by the problems besetting the economy – but not ignoring those relying upon their investments of course which have been badly impacted.

It has not been all bad news either and there are colossal pots of cash swirling-around out there. Several companies have raised new money despite the adverse conditions – from ASOS which raised £247millon in early April from investors who have almost doubled their money already. Beleaguered Costain, with its colossal assured order book of contracts, has raised £100million to shore-up its balance sheet too in an exercise which took no time at all and existing shareholders can have a piece of that pie at a special price too. Several Investment Funds have been able to raise new capital by selling new shares above their asset values – including Ecofin, BMO Managed Portfolio Trust and Fairoaks Income. Several companies like Pollen Street Global and Standard Life Aberdeen are still buying-in and cancelling their own shares with surplus cash. Pollen Street has just declared its latest 12p dividend (48p for the year) and the Fund announced its cash balances have increased from £54million to £90m in the last three months to 31/3/20. The quoted net asset value is £9.63 but the share price is £6.15 and the Fund is still worth £445miillion on the market. Many companies have continued to scrap their dividends and I was especially angry that BT did this without just cause and simply to ‘get on the bandwagon’. However, Vodaphone and Phoenix Life Assurance declared good dividends to help compensate.

We don’t have any but I looked at Temple Bar Investment Trust recently – it started in 1926 and runs gross assets of £635million. The share price has dropped by over 40% in three months. Its pedigree up till then was unquestionable, with a UK portfolio of good quality, mainly larger companies which paid good dividends but circumstances have since conspired to deliver its investors a savage kick. I have to consider that at these levels it is the right thing for us to consider buying as it and its ‘value’ theme are so out of favour.

I have said before that emotionally, the markets seem to have polarised much more into either ‘good or bad’ as far as sentiment is concerned. The coin’s toss is either ‘tails’ or ‘heads’ and there is nothing in between and the markets’ short-term sentiments reflect that and it is unhelpful and unnerving for many. At the moment, all news is bad news. We wait for the coin to flip back the other way – it could be tomorrow or next month but it will come.

At the moment, if your company is say a cinema chain, a pub group or a cruise company, how can your shares be valued? You have no income and until ‘things’ resolve themselves, it won’t change. You have a certain cash pot and an ability of borrowing against assets (what value are they?) but you also still have colossal overheads. This has meant that directly impacted companies have seen their share prices decimated. 60p is as simple a price as is 30p or even 15p and it doesn’t matter if the price ‘before’ was £2 or £10 though the bigger you were the more resources you can call upon. This experience has been jaw-dropping and it was too late to exit after it had happened. It was not gradual. However, the flip side too is that once it repairs, the recovery for the survivors could be rapid and immense in percentage terms, a geared process which as nastily as it escalated downwards then propels the share prices forwards as the business can again be assessed on financial returns and profitability. Perhaps the best analogy is a gold miner. If it costs $1000 an ounce to mine the stuff and the price is $1000, you are standing still. If the gold price goes up to $1050, you make $50 on every ounce mined. If it goes up to $1700 an ounce, then you have escalated your profitability from that starting level by fourteen times. At the moment, the miner is producing gold costing $1000 an ounce and paid $500 on the market. And remember, all the negatives which have pushed certain companies’ shares down further than the average then work in reverse and gear-up the returns significantly in going back to normality.

Too many companies are forgetting their shareholders. I fear for the long-term consequences this may inadvertently unleash – if you can’t rely upon a ’dividend’ (let alone interest payments on your loans or rent from tenants) then the model of ‘natural’ income as the ‘rent money’ for the day-by-day use of investors’ money (and the capital side to look after inflation and economic growth) becomes broken and the idea of capital being raised from investors on the markets could take a very long time for that trust to be rebuilt.

Whilst I have in my time actually seen dividend cheques bounced as the issuer went bust in between times and I can understand that, the speed with which approved and already voted-upon payments were summarily stopped is unwelcome. I have a solution which has legs; just a handful of companies are doing this and more should take note. Duke Royalty Ltd is the latest to do just this.

I understand the fact that businesses do not know how the impact of Covid19 will affect them. However, companies which had made profits and had committed to dividends could continue to pay them but by issuing bonus shares – in other words swapping the cash payment for a share issue on the books. That way, the shares can be sold on the market by shareholders at their timing or even perhaps the companies themselves could arrange a special facility for cash to the shareholders. It would not be rocket science and if the ‘rules’ of investing were allowed to treat such Dividend Bonus shares’ as income, then the yields so important to so many could be preserved (covering life tenants on trusts to all forms of income-entitled recipients).

We don’t need to talk about the semantics of whether it would have a detrimental impact on the capital value of the shares on the market (a very slightly diluted company) but it could have a positive impact on the share price. Tax-wise for non-ISA/Pensions, etc, investors, it would be a CGT event and for most, the inconsequential sum would mean no tax event for the ‘disposal’.

If we think about text books, the ‘net present share price is the value of a discounted flow of future income’. If too many companies try to suggest there is no flow of income then to what level do they really envisage they should see their shares drop – some of the directors making these decisions need to think harder before making such summary decisions as the effect it could have on their companies’ long-term performance could be seriously detrimental.

KEEPING PERSPECTIVE

I am reminded too by fabled investor Nick Train’s reflections of 1800s’ philosopher John Stuart Mill who said:- ‘What has so often excited wonder is the great rapidity with which countries recover from a state of devastation, the disappearance in a short time of all traces of mischief done by earthquakes, floods, hurricanes and the ravages of war. ‘An enemy lays waste to a country by fire and sword and destroys or carries away nearly all moveable wealth existing in it: all the inhabitants are ruined, and yet in a few years after, everything is much as it was before.’ Market routs like this are horrendous and awful. However, as they deal typically with the collective human emotions, they are also like a tragic loss, even a death and here, the grieving process can take two years before a semblance of ‘normal’ reverts. I do not know if Mr Mill’s reflections were ‘two years’ but the tremendous capabilities and resolve of people to pick themselves up, brush themselves off and move onwards and upwards is compelling. There is no reason to doubt that this worst ever economic knock to the world system as we know it will not recover the same. Mr Train is fully invested now.

Remember too that risk is seen differently by people and at different times. There is no one definition but we must all be aware that it exists in our lives. I liked this quotation:- ‘A keen skydiver might believe that commuting by bike in London is crazy, while a regular cyclist might vow never to jump out of a plane. Neither of them is wrong about how risky the activities are, they just have different perspectives. There’s no single answer about which is riskier.‘ If the shares of a sound company are now half what they were three months ago, then in reality they are far less risky than they were then. Never forget to spread your eggs very widely indeed. If you are interested, this is a recent survey on investor sentiments – 7 out of 10 are now optimistic going forwards. https://www.financialplanningtoday.co.uk/index.php?option=com_k2&view=item&id=11585:7-in-10-see-share-price-falls-as-investment-opportunity&Itemid=468&utm_source=newsletter_2158&utm_medium=email&utm_campaign=brewin-financial-planning-income-soars-pension-transfers-hit-eq-adds-passive-esg-range

On 6 May it was the 180^th anniversary of the introduction of the Penny Black, the world’s first pre-paid postal label system. This reminded me that we have the ability to transform ourselves and our societies and we shall do yet again going forwards just as this system did then – don’t ever forget that. Indeed, on that day in 1840 there was also the introduction of prepaid Mulready stationery envelopes and a ‘Tuppeny’ Blue – ten times scarcer than the 1d Black but only until very recently has extensive research discovered that there was unlikely to have been any use on the first day. A Penny Black ‘First Day Cover’ (the stamp used on an ‘entire’ on the first day) is expensive enough (say £30,000 for a decent one!) but collectors have long looked-for a 2d Blue used likewise. Now, 180 years later, research of the records and print details shows that the likelihood of the stamps having been delivered to Post Offices across the Nation (or even in central London) means they could not exist. The few ‘FDC’ fakes have been shown-up for what they are and beware, there are Covid 19 scams and fake investment offers out to defraud you doing the rounds now too.

WARREN BUFFETT’S COMMENTS

Despite having a giant cash pile, Berkshire Hathaway suffered a colossal first quarter loss on its investments. Much reported but after the slump he sold his airline stocks – really it is after the event and he may have held in there but what is more confusing is that the company is not hoovering-up ‘great businesses’ at give-away prices. The more complete reporting on the Sage’s address to an empty hall (usually a bash for 40,000 investors) repeated his confidence in ‘value investing’, however defined. ‘Value’ has been pummelled yet again in this slowdown and over-priced tech stocks have continued to outpace everything else. Indeed, in the UK the FTSE250 (so the companies from 101-350 in size order) are better reflective of UK Plc and the index is still down 30% since January. Regaining that level would see the index rise 44% or put another way, an investor subscribing £1000 to ‘it’ now will buy roughly 44% more shares for the same money. Just think, that means a ‘house’ for sale at £300,000 in January would now be £210,000 for the same property – or for £300,000 you can buy the same house and almost half of another one.

Announcing that he was wrong to invest in the US airline industry, Mr Buffett said that the world has changed because of the Coronavirus. Starting in 2016, Berkshire Hathaway had amassed an 11% stake in Delta Air Lines, 10% in American Airlines, 10% in Southwest Airlines and 9% in United Airlines. The comments came shortly after the investment company announced a record $50Billion (£40Billion) net first quarter loss.

Admittedly, few industries have been affected more than the airline industry with the virtual complete cancellation of all international flights. Holidays have been cancelled and business travel too has come to a complete stop with any meetings now tending to be conducted online. Staff have been furloughed and there is talk of mass redundancies. We seem to be at the peak of investors’ negative sentiment towards the industry and share prices reflect this, being down anything from 50-75%.

Whilst all investment experts will have a view on the airline industry and its recovery prospects once the current virus-related restrictions are eased, it is the timing of the decision which we find a little strange. We would not question an investor of the experience of Mr Buffett, but to sell these colossal stakes in these businesses at such a time with very depressed prices, he must be absolutely convinced that the businesses are no longer worthy of his investment and that he can do better with the equivalent funds elsewhere. He may fear for the viability of the industry as he has exited the sector entirely as opposed to selling only some of the companies or reducing his stakes for example. He may also be factoring in the strength of the US Dollar and considering international opportunities instead where currencies offer better value.

Whilst we do not necessarily have a convincing urge to buy these businesses ourselves (particularly with the currency considerations) we suspect that we would be tempted to remain patient in the current market, even if the desire to exit the sector was the longer-term objective. As lockdowns, travel restrictions and general disruptions are eased over the coming months, global sentiment towards the industry and markets will improve, which we suspect will result in rising share prices and eventually a more favourable outcome for investors.

Of course, these differences of opinions are what make markets, one side wishing to sell (through lost confidence in the business or need for funds) and the other side wanting to buy (as they see an opportunity). We shall monitor developments with interest.

In 2008, the global asset management industry ‘controlled’ $24trillion of assets. Now the figure is $55trillion. That is both positive in terms of what has happened but also it shows the significant importance of the sector and if and when things go wrong and how it really affects ‘all of us’. In 2008, that represented 38% of global GDP (the ‘economy’) and when last measured, it was 68%. These are sobering figures.

PENSION TRANSFERS AND THE LIABILITY

Risk and vulnerability have driven many advisers out of the Pension Transfer advisory market. I can understand why but 60% of advisers in 2008 have now disappeared from this market. We are one of the few still with the regulatory permissions to advise. One of the problems is the open-ended nature of the prospective liabilities even when the reason to transfer or not are so obvious that no-one in their right mind would decline the opportunity. We see the worst and the best and many occupational schemes which are not being fair to their members at all either with the value offered or in the terms especially for those no longer working for the sponsoring company. For example, one we saw last week had a transfer value of over £400,000 but if the chap died before retirement age, if he was single his Estate would receive his own contributions back – a mere few thousands and the scheme would laugh all the way to the bank! The man was unaware of this and yes, he can consider buying life insurance to cover the risk if it is right he stays but if he has seriously impaired health that is not possible. It is all part of the necessary things to review.

Tesco’s pension scheme has just given what may be the biggest ever transfer payment to one of its past executives, Mr Phil Clarke. The man gives-up his ‘guaranteed’ income but exchanges it for a pot worth £10.7million which in theory could be left tax free to charity, family or whatever he wants. I wonder who advised him!

Another core reason for stopping giving advice is the annual cost of Professional Indemnity insurance. All regulated advisers have to have it to cover what later could be considered negligence in the advisory process, amongst other failings. This year, not only has the market shrunk but we have heard of swingeing increases of up to 900% so we should be grateful that ours only rose by 35%. That’s still £72,000 simply to be authorised to advise anything and when someone with a £1million pension wonders why we have to charge a fee which is reflective of the vulnerability cost – let alone to pay for the colossal work involved… there are still too many people who think their transfer value is a ‘fund’ which is theirs. It is not. You are simply a liability to the trustees. That sum can go down as much as it can go up. If the factors affecting Mr Clarke’s liability changed (eg interest rates or other factors like life expectancy) then it could be just as easy for his transfer value to have been £5million in three years’ time even if the stock market doubled.

RISK WARNING

Stock market investments can offer income through the payment of dividends and interest and good opportunities for capital appreciation over the longer term. By this, generally we mean periods in excess of five years, preferably much longer. However, we can never promise you particular returns, especially in the short-term. At any point in time but especially in the short term, your capital could be worth less than the original amount invested as some of the selected holdings may fall in value, regardless of expectations at the time of acquisition. We may also invest in funds that hold overseas securities. The value of these investments may increase or decrease as a result of changes in currency exchange rates. Returns achieved in the past cannot be relied upon to be repeated.

To remind you, why do I send out occasional emails? Because everyone can save money. We have no connection with any companies mentioned and you have to make your own contacts and satisfy your own enquiries. What is in it for us? If we can prove that we are knowledgeable and that our service and advice have good value, then you might contact us for professional financial planning and investment help. You don’t have to do that though and there’s no charge for emails. If simply they save you money, then accept them with our compliments! However, you’ll know where we are!

If you have any queries of any form or indeed any subjects you think I could include, please contact me. I also refer you to our website www.miltonpj.net. We celebrate our 35^th anniversary in 2020 and have been publishing a well-respected independent column in the local Paper for most of that time and free client newsletters as well.

Do not forget however the usual caveats – this is not ‘advice’ and you are encouraged to seek that before embarking upon any financial route involving investments, etc.

My best wishes

Philip J Milton DipFS CFP^CM Chartered MCSI FPFS FCIB

Chartered Wealth Manager

Fellow Of The Personal Finance Society, Fellow Of The Chartered Institute Of Bankers