Company dividends could be under threat, with British businesses near the bottom of international league tables for dividend sustainability after a long spell of payouts growing more rapidly than profits. Dividend cover is expected to be at its lowest level in a decade this year, according to Henderson International Income Trust, an investment trust. Companies making large payouts to the detriment of capital growth may find that it becomes unsustainable, forcing them to cut dividends and to fall into a “dividend trap”. Global dividend payments topped £1 trillion for the first time last year after profits reached a record £2.3 trillion. This year dividends are expected to rise again, by 8.7% to £1.1 trillion, outstripping profit growth of 5.6%.
Legal & General Group (LGEN) new huge plant producing modular housing is one of the most ambitious diversifications attempted by the FTSE 100 insurer. “It’s taken us longer to do it than we thought, but we are very happy. The trajectory looks very positive and promising. There’s good customer acceptance now. The hard yards are over,” said Nigel Wilson CEO. He has just had to tell the Legal & General board about progress to date. Creating what the group says will be the biggest modular housing factory in the world has not come cheap: the subsidiary lost another £20.6 million last year, taking accumulated losses to almost £76 million. But Mr Wilson believes that the size of the potential prize makes the upfront cost worth it. Producing snag-free, low-cost housing on a commercial scale is the holy grail for policymakers desperate to boost new housing starts in Britain to 300,000 a year. The figure was 200,000 last year.
The number of visitors to shops continued to fall last month. Footfall on high streets and in shopping centres and retail parks is now down by 10% compared with seven years ago, according to Springboard, the retail analyst. The defection of shoppers to online retailers has added to the travails of businesses also suffering because of high taxes, weak consumer confidence and Brexit uncertainty. Shopper visits declined by 1.7% in September as heavy rain in the last week of the month led to the lowest visitor numbers to shops in any week since last year’s Beast from the East cold snap. High streets and shopping centres were hit hardest, with numbers declining by 1.8% and 3.2%, respectively. Retail parks fared better, with footfall up 0.1%.
AA (AA.) has launched a hunt for a new chairman two years after it ousted Bob Mackenzie, a former executive chairman, for punching a senior director. The motoring organisation has hired Korn Ferry, the consulting firm, to find a successor to John Leach by next summer, Sky News reported. Mr Leach, 71, joined the AA as a non-executive director in 2014 and took on the chairman role after Mr Mackenzie, 62, was dismissed for alleged gross misconduct in 2017. A legal dispute between Mr Mackenzie and the company over his removal is continuing.
Listed companies have suffered a decline in the quality and quantity of analyst coverage since new European rules were introduced, according to research that contradicts official views. The regulations, which came in at the start of last year, force brokers to charge asset managers separately for trading and research fees. This has encouraged asset managers to cut their budgets for externally produced equity research. Smaller listed companies are in danger of dropping off the radar of large institutional investors, it has been claimed, making it harder for them to raise capital and reducing liquidity in their shares. A review of the impact of the new rules — known as Mifid II — by the Financial Conduct Authority last month found “no evidence of a material reduction in research coverage”. However, in an annual investor relations survey, 52% of British companies reported a year-on-year decline in the number of analysts covering them, while 38% reported a fall in the quality of “sell-side” analyst research.
Land Securities Group (LAND) is close to sealing the £650m sale of a portfolio of cinemas, restaurants and indoor ski slopes as it builds a war chest for deals in London’s real estate market. The company is understood to have agreed to sell its 95% share of X-Leisure unit trust to private equity investor CIT. London offices make up almost half of Land Securities’ £11.7bn property port–folio, and chief executive Rob Noel, who is due to step down next year, is looking to push further into the market despite the shadow cast by uncertainty over the future of WeWork. Mike Prew of the investment bank Jefferies said the co-working provider’s rapid expansion had artificially inflated rents, and this was likely to unwind as the company slows its growth in the capital and focuses on reducing its losses.
Babcock International Group (BAB) is under pressure to replace its finance director after a tumultuous few years. At least one leading shareholder is agitating for the removal of finance chief Franco Martinelli, who has held the role for five years and spent 12 years before that as financial controller. Chairman Mike Turner, the former boss of BAE Systems, was replaced by former Shell executive Ruth Cairnie in July. Since then, the share price has partially recovered. Babcock recently won a contract to build five Type 31 frigates for the navy. Some investors, though, are understood to be pushing for more new blood, and better communication with the City over its performance.
Letter and parcel deliveries could grind to a halt at Christmas if workers at Royal Mail (RMG) agree to a strike this week. About 110,000 members of the Communication Workers Union (CWU) have been balloted over action. The results on Tuesday are expected to lead to a mass walk-out. The planned strike — over pay, conditions and employment terms — comes at a crucial time for the former state-owned monopoly. It is battling against slumping letter volumes, the rise of competitors, such as Yodel and Hermes, boardroom upheaval and Labour’s renationalisation threat. The industrial action also risks undermining the attempts of boss Rico Back to improve productivity and expand parcel deliveries.
Flutter Entertainment (FLTR) could be forced to sell brands including Paddy Power to appease competition watchdogs, analysts say. The company, which this month announced a £10bn merger with Canada’s Stars Group, could face demands for remedies from the Competition and Markets Authority to win approval for the deal, according to Canaccord Genuity. The stockbroker said the most “logical decision” would be to sell Paddy Power’s digital and retail business, given the importance of Stars Group’s Sky Betting & Gaming operation in America. While Flutter, which also owns Betfair, would want to hold on to Paddy Power, the combination with Sky Bet will mean it owns three of the UK’s top seven online betting brands, which could lead to concerns over choice. Canaccord said that any sell-off would be an emotionally “difficult decision”, given the enlarged group’s intention to have its headquarters in Dublin, where Paddy Power is based.
HSBC Holdings (HSBA) is to review its global equities sales and trading business as it tries to slash costs under caretaker boss Noel Quinn, raising the prospect of more job cuts. Europe’s biggest bank is looking to cut 10,000 jobs in Europe out of a global headcount of 240,000 — some of which will come from the sale of its French retail bank. Global equities revenues were $1.2bn (£930m) last year, equivalent to about 2% of group revenue. “Equity desks are becoming more automated — it wouldn’t be a shock if they take more bodies out,” said an investment banker. HSBC is under pressure to shrink its bloated cost base as profits are squeezed by low interest rates and unrest in Hong Kong, where HSBC makes about 80% of its money. The bank posted $52bn of income and $35bn of expenses last year.
The boss of Smiths Group (SMIN) was handed £4.1m in pay and perks after a 13% surge in profits. The base salary of £820,000 for Andy Reynolds Smith was boosted by cash and share bonus schemes totalling £3m last year, which Smiths said were mainly rewards for hitting long-term goals.
ASOS (ASC) is due to admit that pre-tax profits tumbled by 69% to £31.3m after a series of mis-steps. Although sales are thought to have risen 12% to £2.6bn, a string of profit warnings have pushed the online retailer’s shares close to a five-year low
AA (AA.) justifies private equity’s reputation for flogging threadbare companies to the stock market. CVC, Permira and Charterhouse listed the roadside assistance company in 2014. The AA was hobbled from the start. The buyout barons, which bought it from Centrica, extracted hefty dividends and loaded it with £3.3bn of debt before taking it to market. After a brief honeymoon, the shares started to drop in mid-2015 — and it has been downhill ever since. The AA has been battered by a series of problems. Pugnacious executive chairman Bob Mackenzie was ousted in 2017 after a brawl with a colleague. A profit warning last year bruised investors further. Membership has dwindled from 4m in 2014 to 3.19m last month. Earlier this month, the Financial Conduct Authority dealt another blow, warning that it may penalise insurers that capitalise on customers’ loyalty or inertia by charging them higher prices. Debt remains stubbornly high at £2.7bn, with a net debt-to-core profits ratio of 7.8 times. The AA paid £127m in interest costs last year, and a further £24m to reduce the deficit in its £2.4bn pension scheme. AA’s finances are not sustainable in the long term. When the time comes to refinance that mountain of debt, it will face crippling fees and — in all likelihood — more punitive interest rates. A rights issue at this share price is not viable, and selling assets such as its growing insurance business is a road to oblivion. It may be generating cash, but at this rate it would take decades to clear that pile. That leaves either a sale or a messy restructuring, probably involving a debt-for-equity swap. Until someone comes up with an answer, the AA is too big a risk. Avoid.
