Lloyds take £660m hit from TSB sale

Otmane El Rhazi from Mindful Money » Shares.

The sale of TSB has triggered a £660 million charge for Lloyds and pushed profits to fall 11% in the first quarter.

 

The £1.7 billion sale of TSB means Lloyds has reported a Q1 profit decline despite rising revenues. TSB is being sold to Spanish bank Banco Sabadell and the deal means Lloyds has to pay a £450 million for moving IT platforms and future IT licencing revenues, taking the total charge to £660 million.

 

Lloyds chief executive Antonio Horta-Osorio said the bank would pay a half-year and a full-year dividend in 2015, which is good news for shareholders in the bailed-out bank who have gone without a pay-out for a number of years.

 

Profits for the first three months of the year at Lloyds was down £155 million to £1.2 billion but underlying profits increased 21% to £2.2 billion and the bank reported lower costs.

 

‘We have made a strong start to the next phase of our strategy as we continue to support and benefit from UK economic growth,’ said Horta-Osorio.

 

‘I am pleased with the continued improvement in financial strength and performance in the first quarter and expect our plan to deliver sustainable growth and improved returns.’

 

The return to higher-paying dividends, after a token dividend payment last year, will be good news for chancellor George Osborne should he return to government after the election.

 

He has said that under a Conservative government there will be a £4 billion retail offering of Lloyds shares as part of the government’s plan to reduce its stake in the bank. The taxpayers owned 41% of Lloyds in 2008 following the financial crisis but today own 21%.

 

Apple Inc “is a one product company”

Otmane El Rhazi from Mindful Money » Shares.

This quarter, once again, the iPhone stood out for its revenue and volume growth, spurred by China and emerging markets where Apple is winning over Android by a significant margin writes GAM investment director Mark Hawtin.

This is thanks to the introduction of a large screen format which is particularly favoured in emerging markets.

Apple is a one product company. Nothing else really moves the needle and the growth of iPad and Mac sales is not even close. It seems clear that the iPhone 6+ is cannibalising iPad sales – iPad revenues were down 29% year-on-year in Q1, most likely hurt by the better iPhone volumes as well as an elongation in the replacement cycle.

Looking at the Apple Watch, initial indications suggest it might be less successful in volume and profitability than expected. Currently, the information available on the Watch is very qualitative and there is a lack of clarity. Apple announced that it is not making enough watches to meet demand, but we do not know what the demand is or how many watches are being produced.

Apple is definitely benefitting from the phenomenal success of the iPhone 6 at the moment, but we remain concerned that margins will eventually start to give way. In consumer electronics margins always eventually close and although Apple might be different, there are currently many higher growth businesses with more compelling, sustainable business models.

Royal Dutch Shell’s first quarter results confound expectations despite deep slide in earnings

Otmane El Rhazi from Mindful Money » Shares.

Royal Dutch Shell reported on Thursday that its revenues dropped 40% to $65.7bn in the first three months of 2015 compared to the same period last year, beating market expectations.

In addition,it endured a 56% decline in earnings to $3.25bn as lower oil prices hit home. But despite the slide, the overall broker consensus towards the shares remains a ‘buy’.

Ian Forrest, investment research analyst at The Share Centre, said that while the latest numbers were ahead of forecasts, they still “clearly demonstrated the impact of lower oil and gas prices”.

In its market update, Shell said that it expects production in the second quarter to fall by 400,000 barrels compared to the same period last year. Forrest said: “We believe that this suggests the £47bn merger with BG, announced earlier in April, has come at just the right time.”

He added: “Investors should acknowledge that the downstream refining business improved its margins and lowered cost levels, while the upstream business saw production down 2% to 3.17m barrels of oil a day.”

There were also some reassuring aspects for investors, as the quarterly dividend was maintained at $0.47, while the oil major is also having some success with selling non-core assets and reducing its costs.

Royal Dutch Shell chief executive officer Ben van Beurden said the results reflected the strength of its “integrated business activities, against a backdrop of lower oil prices”

He added: “In what is clearly a difficult industry environment, we continue to take steps to further improve competitive performance by redoubling our efforts to drive a sharper focus on the bottom line in Shell.

“Looking ahead, the proposed combination with BG, which we announced in April, would create a stronger company for both sets of shareholders.”

For Forrest, Royal Dutch Shell remains his favourite oil and gas major, and recommends it as a ‘buy’ for medium risk, income seeking investors. He said: “The company represents a core holding for most portfolios due to the relatively stable cash flows and attractive dividend income that it generates.

“At this price the group’s shares do not look overvalued compared to its main peers and the BG deal, along with the $25bn share buyback programme, are all positive news for investors.”

Royal Bank of Scotland posts £446m loss for the first quarter of 2015

Otmane El Rhazi from Mindful Money » Shares.

Majority taxpayer owned Royal Bank of Scotland has reported a £446m loss for the first three months of 2015.

The bank, which is still 80% owned by the state after being bailed out with Government cash during the financial crisis stated that the result is on the back of “restructuring costs” of £453m as well as setting aside £856m for “litigation and conduct charges”.

Its results are in stark contrast to the £ 1.2bn profit made a year ago. But excluding the charges, adjusted operating profit rose 16% to £1.63bn as RBS benefited from “generally benign credit conditions” and “continuing reductions in operating costs”.

Following Thursday’s announcement shares in RBS had fallen by 3% or 9.5p to 340p by 09:19.

The bank said it was making “good progress towards its stated 2015 targets” and that it was creating a “stronger, simpler business”, adding that it “remains committed to achieving its target of being number one bank for customer service, trust and advocacy by 2020”.

RBS chief executive Ross McEwan warned that the bank, which is facing penalties for foreign exchange manipulation faced “another tough year” and that further restructuring is still to come.

Mindful Money’s weekly shares watch: BP, Royal Dutch Shell, RBS & Lloyds Banking Group

Otmane El Rhazi from Mindful Money » Shares.

The dramatic fall in the oil price since last June will provide the primary backdrop for BP when it updates the market with its first quarter results on Tuesday.

While the oil major’s shares are down by 1% over the past year, over the last three months they have jumped by 12%.

Looking ahead to the group’s report, Keith Bowman, equity analyst at Hargreaves Lansdown expects that underlying replacement cost profit for the quarter is likely to have fallen year-over-year, with the dividend payment forecast to be left unchanged.

On a more positive note, the fall in the price of oil may have assisted its Downstream arm’s refining operations, whilst its management’s previously announced move to reduce capital expenditure could again be underlined.

Bowman says: “On balance and with uncertainties regarding the oil price, the group’s exposure to Russia and full legal settlement of its Gulf of Mexico accident, weighed against speculative takeover hopes following the bid for BG Group and a dividend yield of over 4.5% analyst consensus opinion currently points towards a ‘strong hold’.”

Fellow oil behemoth Royal Dutch Shell follows on Thursday with its own set of first quarter numbers and it will be the first trading update since the announcement of the takeover for BG group, and investors will be keen to hear more about the potential benefits of the merger.

Sheridan Admans, investment research manager at The Share Centre, who rates has the business on his ‘buy’ list says: “Oil prices have stabilised since the lows in January but year on year comparisons in revenue terms will obviously fare badly.”

Notably the firm’s ‘b’ shares, the preferred stock for UK investors, have fallen by 12% over the past year and are down by 7% over three months

However Admans believes investors should be encouraged by increased production levels. “With the lower oil price environment, there could be further cutback in capital expenditure and asset sales such as those in the US and Africa,” he adds.

Ahead of the update, the overall analyst consensus has cooled somewhat in recent months, but still denotes a ‘buy’.

The still majority state-owned Royal Bank of Scotland also reports its first quarter results on Thursday.

The upcoming UK General Election amongst other factors has only served to elevate investor uncertainty, as highlighted by the 8% drop in the bank’s share price over the past three months.

Bowman notes that an update for its Corporate & Institutional Banking (CIB) division’s planned reduction of its geographical footprint to approximately 13 countries, compared with 38 at the end of 2014, could be forthcoming, whilst management’s ongoing focus on cost cutting is likely to be further underlined. He says: “Ahead of the news, and with the UK government’s majority shareholding still overhanging, analyst consensus opinion signifies a ‘sell’.”

Friday sees Lloyds Banking Group publish its own first quarter results, which arrive in the wake of the Conservative Party’s pledge to sell £9bn of Lloyds’ shares if re-elected, with retail investors being offered around £4bn of the shares at an initial discount.

Admans, who lists the bank as a ‘hold’ says: “With the majority of restructuring now over, investors can concentrate on the future plans. Other areas to focus on are costs, margins, bad loans and the group’s outlook on the UK economy, particularly the important housing market. Hopefully there will not be any further provisions for PPI mis-selling or other regulatory issues.”

Bowman adds that a further reduction or ending of PPI provisions could potentially help set the scene for another reduction in the government’s shareholding, bolstered by a continued shrinkage in impairments or bad debt provisions.

He says: “The board’s reiteration of its aim to pursue a progressive dividend policy with both an interim and final dividend payment for 2015 planned – it paid 0.75 pence per share in 2014 – could also help aid a potential further government share stake sale.  Prior to the release and with the bank seen as a beneficiary of further UK economic recovery, analyst consensus opinion denotes a ‘buy’.”

HSBC could leave UK, but resurrect Midland Bank before it goes

Otmane El Rhazi from Mindful Money » Shares.

HSBC shares increased today as the bank said it was considering moving it s headquarters out of London, as speculation grows that it could bring back Midland Bank.

 

Following ‘regulatory and structural reforms’ undertaken since the financial crisis, the bank – which has come under fire due to its part in high-level Swiss tax avoidance – is now considering moving out of the country.

 

The bank’s board has asked the management team to ‘look at where the best place is for HSBC to be headquartered in this new environment’, chairman Douglas Flint will announced at the bank’s AGM.

 

Flint said: ‘The question is a complex one and it is too soon to say how long this will take or what the conclusion will be; but the work is under way.’

 

Shares increased 3% higher on the news.

 

The move could be partly down to a plan set out in the Budget to increase the bank levy from 0.156% to 0.21%. Banks with large balance sheets, like HSBC, will be hit – it paid £750 million in bank levies last year of a total £1.9 billion raised by the government.

 

The fact that the UK’s place in the European Union is also uncertainty has further alarmed the bank, stating that a potential referendum is a source of ‘economic uncertainty’.

 

As part of the move the bank may sell off its retail bank and there is speculation that it would lead to the resurrection of its Midland Bank brand. It took over Birmingham-based Midland Bank in 1993.

 

 

Government sells £586m of Lloyds shares

Otmane El Rhazi from Mindful Money » Shares.

The government has offloaded more of its share in Lloyds bank, raising £586 million.

 

The stake held by the taxpayer is now 21%, down from the 41% held after the government ploughed £20 billion into the bank to stop it from collapsing during the height of the financial crisis in 2008.

 

The government started the sell off of Lloyds shares in 2013, and following the latest sale it has now raised £8 billion.

 

The sale comes after prime minister David Cameron said if the Conservative party was re-elected it would sell  £4 billion of Lloyds shares to private investors in order to ‘help us recover billions more to pay down the national debt’.

 

In the latest sale the government sold 742 million shares raising £586 million, based on Thursday’s price. However, the total raised may be lower as the sale would have happened during the day and Lloyds share rose during the say to a closing high of 78.9p.

 

‘Today’s announcement shows the further progress made in returning Lloyds Banking Group to full private ownership and enabling the taxpayer to get their money back,’ Lloyds said in a statement.

 

‘This reflects the hard work undertaken over the last four years to transform the group into a simple, low-risk and customer-focused bank that is committed to helping Britain prosper.’

 

Would Lloyds bank sale echo Royal Mail IPO and encourage more first-time investors?

Otmane El Rhazi from Mindful Money » Shares.

The sale of £4bn of Lloyds shares to the general public proposed by the Conservative party over the weekend, would be a positive move for private investors, as it will encourage them to save and invest for the future claims broker Hargreaves Lansdown.

Some 40% of investors it surveyed said that their first investment was in an IPO (Initial Public Offering) but around 90% of companies exclude retail investors from their flotation.

Laith Khalaf, senior analyst, Hargreaves Lansdown said: “The public sale of Lloyds shares would be such a large and high profile offering, it would undoubtedly generate a lot of interest from the public, and would prompt many people to invest for their future for the first time.”

The Royal Mail flotation of 2013 was a similarly high profile sale by the government, which captured the public imagination. The offer was seven times over-subscribed, such was the demand for shares.

Some 28% of Royal Mail investors surveyed said it was their first ever stock market investment. However many companies coming to market only offer shares to institutional investors. Around nine out of every ten companies coming to market in 2014 excluded retail investors from their flotation.

Lloyds is already popular with DIY investors

Around 14% of DIY investors hold Lloyds – based on Hargreaves Lansdown clients – and collectively have 2.5% of their portfolios in the bank. Lloyds makes up around 2% of the FTSE All Share, so DIY investors are effectively ‘overweight’ the stock.

Khalaf said this proportion is likely to grow, if Lloyds returns to paying a dividend as expected. “Analyst expectations are presently for anything between a 3.3p and 7.0p dividend per share in 2017, which would equate to a yield of between 4.2% and 8.9%, assuming today’s price of circa 80p per share,” he said.

Fund managers are underweight Lloyds

UK fund managers are not as positive on the bank. Collectively they hold 1% of their portfolios in Lloyds, so are underweight the stock. “Part of their reluctance to invest probably comes down to the overhang of a large amount of stock, which the government is soon going to look to offload,” said Khalaf.

But he highlighted that there are some high profile fans of the bank amongst professional investors though – Steve Davies holds a 7% exposure in his Jupiter UK Growth fund, and Alistair Mundy holds 4% in his Investec UK Special Situations fund.

Khalaf said: “Even some income fund managers have built up positions in Lloyds, despite the fact it isn’t currently paying a dividend. Adrian Frost, manager of the £7 billion Artemis Income fund, has a 1.7% position in Lloyds as he believes the bank will soon be paying a rising dividend stream.”

2015 set to see strongest dividend growth since 2012

Otmane El Rhazi from Mindful Money » Shares.

Despite poor headline figures shareholders payouts from UK firms have enjoyed a decent start to 2015 spurring on analysts to up their expectations for the year.

According to the widely observed UK Dividend Monitor from Capita Asset Services headline dividends in the first three months of 2015 totaled £14.75bn, marking a heavy 52%.

But at the underlying level, which strips out special dividends, the total reached £14.49bn, down 0.3% year on year.

The decline is down to two factors, namely Vodafone paid its world record £15.9bn special dividend in the first quarter of 2014, distorting year-on-year comparisons at a headline level.  Equally, the reduction in size of Vodafone since the disposal of Verizon has reduced the total the company paid out in the first quarter of this year by £840m.

Capita highlighted too that Barclays delayed the payment of its final dividend by five days, shifting £630m of first quarter dividends into the following three-month period. At almost £1.5bn, the combined effect of these two payments is over a tenth of the first quarter total.

Adjusting for these factors, the figures are much more positive for investors with the latest quarter seeing the fastest growth rate in almost three years, up 10.4% year on year before special dividends.

Dollar strength has helped too after rising by 12% against the pound, compared to a year earlier. With 53 companies in the FTSE 350 reporting in dollars, and denominating their dividends in that currency, the exchange rate effect is a significant one for investors to consider, and will boost 2015 payouts.

As a result of strength in the FTSE 250, faster than expected underlying growth in the first quarter, and return of Lloyds Bank’s dividend, Capita has increased its 2015 forecast to £86.5bn, up from £86.1bn. On an underlying basis, Capita has revised its forecast up by £500m, with dividends forecast to reach £84.1bn. If this total is achieved, the rate of growth for 2015 of 6.4% will be the highest since 2012

Justin Cooper, chief executive of Shareholder solutions, part of Capita Asset Services said: “2015 is off to a flying start for income investors, boding well for the full year. At last we will see strong growth this year, after a disappointing couple of years for dividend growth. Yes, the quarter pales in comparison to a year ago at a headline level, when Vodafone paid a world record dividend following its Verizon stake sale. But under the surface, things are clearly picking up pace.

“Challenges remain, not least in the supermarket sector, where the payouts are vulnerable. Shareholders are bearing the cost of the sector’s price war. Tesco’s cuts could cost investors up to £1bn. But the reinstatement of Lloyds Bank’s dividend will give investors optimism, marking a milestone for the recovery of the market.”

 

Venture capital trust dividends soar to new high on their 20th anniversary

Otmane El Rhazi from Mindful Money » Shares.

On the 20th anniversary of the creation of Venture Capital Trusts (VCTs) figures from trade body the Association of Investment Companies (AIC) highlight that dividends across the asset class are at their highest-ever annual level.

AIC data shows the VCT sector paid out aggregate dividends of £240.3m over the year to 31 March 2015, compared to £231.1m over the year to 31 March 2014.

The average VCT is currently paying an average yield of 8.2%, with the average generalist VCT yielding 8.8% and the average AIM VCT yielding 5.6%.

The level of aggregate dividends continued to be dominated by generalist VCTs focused on private equity and development capital due to:

• A larger amount of funds being managed by the sector from which dividends are being paid
• An increase in the number of VCTs seeking to pay annual dividends of circa 5p per share
• A number of VCTs paying “special dividends” to shareholders

The amount of dividends paid by the AIM focused VCT sector in the year to 31 March 2015, at £21.7m, is comparable with the year to 31 March 2014, at £22.7m, when taking into account that there is a reduced number of AIM focused VCTs in existence at 31 March 2015 compared with at 31 March 2014.

Ian Sayers, chief executive, AIC, said: “It’s been a good year for the VCT sector, with strong fundraising for the 2014/15 tax year and funds under management at a record high.  As the sector has matured, it is encouraging to see so many VCTs offering consistent and attractive yields.  The companies VCTs invest in start small, and as such are high risk, but the tax advantages on offer can be appealing for investors willing to accept the risks. The increase in average dividends paid is one of many reasons why income hungry investors might want to consider VCTs as part of a balanced portfolio.”

 

 

Prime Minister proposes £4bn Lloyds share sale for retail investors

Otmane El Rhazi from Mindful Money » Shares.

Some £4bn worth of Lloyds Bank shares would be offered to retail investors at a discount price if the Conservatives win the election, Prime Minister David Cameron has told the BBC.

The offer would be part of the £9bn sale announced in the Budget in March.

The proposed sale would mark the biggest privatisation since the 1980s when Margaret Thatcher’s Conservative government sold-off almost £4bn of BT shares and £5.6bn of British Gas stock. in the famous

Cameron said it would “help us recover billions more to pay down the national debt”.

However, the report highlighted that Labour said the Conservatives have announced such plans at least seven times before.

Shadow Chancellor Ed Balls said he would be “happy to have a look at” the plan as long as it would not lead to big institutional investors “making a killing”.

Under Cameron’s proposed offer investors would get a discount of 5% on the market price at time of sale, with the minimum purchase set at £250 and maximum at £10,000.

The government bailed out Lloyds at the height of the financial crisis and already its stake has been halved from 43% to 22%. Earlier this year the bank returned to the dividend register for the first time since its rescue.

Shares in Lloyds are presently trading at circa 79p, having risen by 7% in the past year.

Unilever’s sales boost represents good news for investors

Otmane El Rhazi from Mindful Money » Shares.

As Unilever provides a first quarter trading update, Ian Forrest, investment research analyst at The Share Centre, explains what it means for investors…

On Thursday consumer goods giant Unilever cheered the market with its first quarter update. It reported a strong recovery in its performance compared to the previous quarter, with an overall 12.3% rise in sales. Underlying sales growth was also up 2.8%.

Unilever’s forecast-beating results were boosted by favourable currency movements, such as the strong dollar. This is good news for investors in the Ben & Jerry’s ice cream and Dove soap manufacturer, as is the 6% rise in the quarterly dividend.

The group remains keen to expand in emerging markets, and investors should note that an ongoing cost-cutting programme is steadily increasing profit margins and helping to offset higher commodity costs.

The company said it expects volume growth to continue to improve, backed by a good pipeline of innovative products, and it is now experiencing more tailwinds than headwinds.

As a result of these good figures, alongside the upbeat comments on future prospects, we are upgrading our recommendation to a ‘buy’ for lower risk investors. The well managed and diverse portfolio of global brands and the healthy dividend are also major attractions. Unilever shares trade on a fairly high price/earnings multiple at present, so we would suggest investors drip-feed steadily into the stock over time.

US banking giant Goldman Sachs boasts best three month revenues in four years

Otmane El Rhazi from Mindful Money » Shares.

US investment banking giant Goldman Sachs has reported that quarterly revenues at the firm jumped to their highest level in four years during the first three months of 2015.

In its latest market update, the group announced it has witnessed net revenues rise to $10.62bn over the period – a 14% year-on-year rise, while net earnings came in at $2.84bn.

The bank’s investment banking arm saw net revenues rise to $1.91bn, its best three-month performance since 2007. The progress in the division not only marked a 7% increase higher on the first quarter of 2014 but a 32% hike on the final three months of last year.

But the top division over the period was market making, where net revenues came in at $3.93bn, up a massive 49% on the same period last year.

Goldman Sachs chairman and chief executive officer Lloyd C. Blankfein said: “We are pleased with our results this quarter and the fact that all of our major businesses contributed. Given more normalized markets and higher levels of client activity, we remain encouraged about the prospects for continued growth.”

Shares in Debenhams rise as retailer boasts 4.3% increase in pre-tax profits

Otmane El Rhazi from Mindful Money » Shares.

Shares in Debenhams jumped almost 5% following its announcement that pre-tax profits at the group rose 4.3% to £88.9m in the six months to end of February.

On Thursday the high street stalwart announced that group like-for-like sales increased by 1.3% and that online sales had surged by 12.7% over the period.

The firm also managed to reduce its net debt by £62.4m to £297.3m. By 09:15 stock in the FTSE 250 listed retailer had moved 3.66p higher to 83.26p.

Debenhams chief executive Michael Sharp cited the improvement of its multi‐channel offer and the successful introduction of its premium delivery service as having helped to boost the firm’s results.

He added that the “continued refocusing” of its promotional strategy delivered a strong increase in full price sales and that an improvement in “value perception” had enabled it to end the period with an improved stock position.

The past half-year period has witnessed a marked turnaround in the company’s share price performance, with its stock up 32% over the period, against a 2% fall over 12 months – currently the broker consensus towards the shares is a ‘hold’.

Sharp said: “Overall we delivered a good first half performance despite a difficult clothing season in Autumn and we are on track to achieve full year expectations.

“Looking forward, our customers tell us they are feeling a little more optimistic about the economic outlook, but they remain cautious. Accordingly we are continuing to plan prudently in the near term, while remaining focused on our strategic priorities, and are continuing to invest to ensure that our business is well‐positioned to drive sustainable growth in the longer term.”

Discount hotel chain Travelodge reports 63% jump in annual earnings

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Travelodge has reported a significant jump in earnings some three years after it faced ruin.

On Monday the discount hotel group announced that its underlying earnings has surged by 63.5% during 2014 to more than £66m, while revenue per room soared by 16.8% to £34.24.

The positive market update arrives as Travelodge’s owners are reportedly gearing up to sell the business for a potential £1bn.

In 2012, investment banking giant Goldman Sachs, Avenue Capital and GoldenTree Asset Management took over the group when it faced collapse after amassing debts of £500m.

BBC News reported that the consortium is understood to be looking to appoint advisers to examine strategic options, including a possible stock market flotation.

Speaking to BBC Radio 5 Live’s Wake Up To Money on Monday Travelodge chief executive Peter Gowers said the current owners were “not natural long-term holders of the business”.

He added: “I think you’d expect them always to be thinking about ways to realise value from their shareholdings.

“There’s probably never been a better time to run a value hotel business than now because the value hotel sector is huge. Britain is becoming a nation of value shoppers.”

Despite share price rally Royal Dutch Shell is a ‘buy’

Otmane El Rhazi from Mindful Money » Shares.

Helal Miah, investment research analyst at The Share Centre, highlights why he believes Royal Dutch Shell is worth investors’ attention…

As the largest listed company in the UK, Royal Dutch Shell is a sector leader producing fuels, chemicals and lubricants worldwide.

This week, the company confirmed its takeover of BG Group, and to some investors the premium of 50% to the close price prior to the announcement can be considered as high. However, we believe Royal Dutch Shell will continue to be a very good dividend payer for many years and the timing of the acquisition – when oil prices are low – could in hindsight be seen as astute. This acquisition makes strategic sense, adding 25% to Shell’s proven oil and gas reserves and 20% to annual production and lead to annual cost savings of $2.5bn.

The group’s portfolio will undergo major reorganisation in the years to come, which may bring positive rewards to investors in future. The dividend yield in excess of 5.5% remains very attractive and the share price is likely to be supported by a share buyback program.

Despite the fall in the oil price, we continue to recommend Royal Dutch Shell as a ‘buy’ for low risk income seekers. We believe it still represents a core holding for many portfolios due to the relatively stable cash flows and attractive income that it generates.

Watch out for the growing list of ‘exceptional’ items in company results

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Every results season offers The Value Perspective the opportunity – the obligation even – to work through a wide range of announcements to see how companies are getting on financially and what they are saying about life writes Andrew Lyddon…

Along the way we also see how they present what they are saying and, in recent years, have noticed the lengths some businesses are going to present their earnings in a more favourable light.

Rather than concentrating on the past by naming and shaming individual offenders, we will instead focus on some of the methods companies have started using to try and flatter their reported numbers. That way, visitors to The Value Perspective will be better equipped to spot instances themselves in future reports and accounts.

By their nature, these issues will rarely be black or white and with restructuring – a particular favourite with the adjusters – the greyness relates to how much something is truly an exceptional item rather than a continual cost of doing business. Some costs associated with closing a business, say, could well be a true one-off but, if a business needs to ‘restructure’ every year to keep up with the latest trends, it probably is not.

Speaking of trends, something we are seeing more and more in the retail sector is businesses looking to make an adjustment for the cost of refitting stores and then flagging that as ‘exceptional’. Again, it can be a matter of degree but surely one must at least ask the question as to how much keeping your stores looking nice so customers actually want to visit actually counts as an exceptional, and how much it is just a basic cost of retailing.

Another adjustment classic relates to acquisition costs. If a company is regularly buying other businesses, should the legal, investment banking and other costs being incurred every year in relation to that really count as exceptional? That is before we start to consider whether the reason a company is having to make regular acquisitions is to compensate for underinvestment in R&D or marketing.

In a similar vein, the same question may be asked about costs incurred by companies that regularly have to defend themselves against legal actions. For a number of multi-nationals – banks, pharmaceuticals and tobacco companies would be obvious examples – fighting lawsuits, dealing with regulators and so forth is not so much exceptional as a cost of staying in business. You might take a different view on the explicit large fines such companies can face but even negotiating their size is arguably part of the decisions those businesses make every day.

Then, since we mention the pharmaceutical sector, there are research and development costs – and indeed explorations costs for, say, oil and mining businesses. It is a well-established accounting practice that, if these costs are expected to have a high probability of leading to revenues or similar in the future, they can be capitalised as an asset on a company’s balance sheet rather than charged against profits on day one.

This is open to a fair amount of management discretion as it is, but the real distortion comes if it later transpires these costs will not yield any benefit, which results in the asset having to be written off. These write-offs tend to be treated by companies as exceptional items yet, if you are an oil producer or a pharmaceutical company, say, respectively digging for oil and investing in research and ending up with nothing to show for it is not so much exceptional as a fact of business life. In this way the inevitable costs of failed endeavours all businesses have can be hidden both as they are being incurred and when they are written off.

There are other examples of these rather unexceptional exceptionals – stripping out the costs of running a company pension scheme, stripping out the costs of giving employees shares as part of their remuneration package and so on – but you get the idea. The bottom line, if you will excuse the pun, is there is a growing list of reasons for investors to be wary of how companies are stating their profits.

In order to build up a real sense of what a company’s profits and cash generation actually are – and that, after all, is how you appraise the value of a potential investment – investors need to roll up their sleeves, dig into the numbers and come to their own view on whether certain costs really are as exceptional as some companies would appear to believe. Blindly accepting a company’s view of what its real profits are is an increasingly perilous thing to do.