Neil Collins’ Notebook – Big dud companies hold the UK back

Shocking statistic of the week: A loss-making car company is now considered to be more valuable than the entire UK stock market. That’s not strictly true, since Tesla has managed to show a profit in recent quarters, but only because other carmakers are obliged to buy carbon credits to avoid heavy fines for not meeting new emission standards – hardly a long-term source of revenue.

The statistic illustrates how miserable the performance of London shares has been in recent years, but it hardly gives a true picture of the health of the market. The FT100 index is dominated by some big, dud companies, with the banks at the top of the list. Since they are not allowed to pay dividends even when their directors think they can afford to, they are impossible to value.

Suffice to say that Lloyds Banking, Barclays and HSBC are all worth twice as much dead as alive, if the book value of their assets is any guide. It would concentrate a few minds at the Bank of England were Lloyds’ management decide to shrink itself and return half its capital to the long-suffering shareholders, but that would be considered so outrageous that a way would be found to prevent it. Meantime the share price sulks at levels not seen since the 2008 banking crisis.

Among other big duds, few can match Aviva, now under new management (again). Like the previous new management, the CEO is promising radical action, but she might yet be frustrated by the arcane rules regarding solvency requirements which make breaking up the group awkward and expensive. The shares first reached today’s price 32 long years ago.

Then there is BT, whose newish management faces the familiar three-way stretch between the pressing need to bring fibre optic cable to the masses, an intractable pension fund deficit, and coping with too much debt. The dividend has already been sacrificed. The shares are lower now than they were at privatisation in 1984.

However, the biggest drag on the FTSE100 has been oil. Two of the world’s biggest half-dozen majors are listed in London, and recent history has not been happy. BP suffered from the disaster in the Gulf of Mexico, while Royal Dutch Shell has a different type of self-inflicted wound.

A devastating analysis by Ron Buosso for Reuters spells out just how much Big Oil has squandered in recent years, either on vast over-running projects or exciting takeovers. Few deals match Shell’s $54bn purchase of BG in 2016. Chief Executive Ben van Beurden argued that it would support Shell’s dividend under almost any imaginable oil price scenario. Despite his lack of imagination, Van Beurden is still there despite being forced to cut the dividend for the first time in half a century, slashed by two-thirds to help deal with the group’s burgeoning debt.

This is an extreme example, but Big Oil’s attempts to do something different have frequently ended in expensive write-offs. On what we know currently, it is unlikely to be any different this time, as they pivot towards fashionable greenery. The only consolation for us shareholders is that the balance sheet will not stand another awfully big adventure, and the next management might decide that sticking with the black stuff is more rewarding, if less exciting.

The US indices are flattered by the spectacular performance of the tech giants, as Simona Gambarin argues for Capital Economics. Take away those big duds, and the performance of UK shares is comparable with other markets. The key question is whether those dinosaurs are really doomed, or whether their fortunes can be revived with good management, but that’s a story for another day.

Farming Today

On Thursday last week The Times splashed a banner across the top of its front page warning of rising bread prices, thanks to a weather-beaten British harvest.

It was perhaps unfortunate that the very same day, the International Grains Council published its forecast for this year’s harvest. Here it is: “Total global grains production will reach 2.230 billion tonnes this marketing year, up 50 million tonnes from the July forecast and 9% higher than the previous year (2.181 billion tonnes).” For good measure, the wheat crop is also expected to be a record.

This is not the “we’re all doomed” narrative that sustains the BBC or the Climate Catastrophists, and the paper has not found space to report the IGC forecast. If it does so, it might add that the record harvest is from a dwindling acreage under cultivation, that food shortages are nearly always a consequence of politics, and that your loaf is unlikely to cost more next year.

Trailblazing

Mike Gooley was looking forward to writing a celebration of next month’s half century of Trailfinders, from his “pathetic little start-up” to today’s top-rated business. Instead, he’s hopping mad, because the travel industry has behaved so badly in the pandemic.”Embezzlement is defined as the use of monies for a purpose not intended” he writes, pointing out that airlines and travel companies are free to use advance funds to finance their costs “and even dividends and bonuses.”

From the start in 1970, Trailfinders had two bank accounts, one for the business and one for customers’ money. Over the years, profits have been retained, so that “we have been able to refund our clients while we wait to recover your money from airlines.”

In a perfect world, all travel businesses would be obliged to have segregated accounts at all times. Considering the industry’s woeful performance, it would restore trust and might even stimulate demand from nervous travellers. Perhaps the government could ask Mr Gooley to draw up the rules.