Heroes: For Whom the Bell Tolls 

 

‘Hey yeah, outside I’m masquerading 

Inside my hope is fading’ 

 
As we suffer the Tories’ never-ending good bye, its time to assess the cost of their legacy.  

Before doing so, and in recognition that DIY is investment based, I want to look at share buybacks. 

There are two reasons for this, firstly they are a ‘marmite’ option, and secondly the LibDems are considering taxing them. Whilst this might sound extreme, it is, I suspect, based on the US who, in  January 2023, introduced a ‘buyback tax’, forcing companies to pay tax amounting to 1% of the value of any buybacks. From 2024, the rate will rise to 4%. 

It is suggested that the LibDems will propose a 4% tax rate, which, it is estimated, would raise C. £2bn p.a., in revenue. 

Schroders calculate that 38% of large US companies bought back at least 1% of their shares during 2023. In the UK, for the second year running, large companies almost matched the US last year . Furthermore, the proportion of UK companies doing larger amounts of buybacks is actually higher than the US. 13% of large UK companies bought back at least 5% of their shares last year compared with 9% in the US. 

I use the term ‘marmite’ as share buybacks divide opinion. In their favour they enable management to return excess cash to shareholders in a way that is less binding in the long term than a dividend increase. Investors also benefit as capital gains are often taxed at a lower rate than income. 

Those opposed to the idea, say they can enable manipulation by management. The same earnings divided by a smaller number of shares leads to an increase in earnings ‘per share’. If executive remuneration is naively linked to earnings per share growth this benefits management to the detriment of shareholders. 
 

‘As we suffer the Tories’ never-ending good bye, its time to assess the cost of their legacy’

 
In addition, it is way for management to support the share price, again potentially boosting their compensation.  

Perhaps, the biggest negative is that is can starve the business of investment for the future. By way of an example, I have compared two businesses in the same sector, Boeing and Airbus. 

Between 2010 and 2023, Boeing spent C. $70 billion on R&D plus new plants and equipment. This equated to C.6.2% of sales generated over that span. (1) 

Over the same period, Airbus spent about $93 billion, or 9.5% of sales. 

Over the past 10 years, according to Bloomberg, Boeing has spent some $59 billion returning cash to shareholders, including about $20 billion in dividends and $39 billion on share repurchase. 

Airbus has spent, essentially, nothing on share repurchases and about $10 billion on dividends over the same 10-year span. 

Choices about returns of capital and investment spending are management decisions.  

Boeing shareholders benefitted from managements actions; from the end of 2013 to the end of 2018, Boeing stock returned about 20% a year on average, according to Bloomberg. Airbus stock returned about 10%. 

Since the end of 2018, however, Boeing stock lost C. 7% a year on average, whereas Airbus shares rose C. 13%. Over the past 10-yrs, Boeing has returned 7.1% annually including reinvested dividends, while Airbus’ ADRs have returned 9.5%. 

Back to the article’s main theme, we start with Thames Water. 

The water industry, post-privatisation, has served shareholders at the expense of consumers. 

Analysis shows that English water companies have handed >£2bn a year on average to shareholders since they were privatisation, C.£60bn in total. 

Despite paying these huge dividends they have failed to carry out significant national infrastructure works to improve the water and sewerage system. 
 

‘The water industry, post-privatisation, has served shareholders at the expense of consumers’ 

 
When Margaret Thatcher sold off the ten regional water authorities in 1989 the Treasury received the princely net sum of £.1.1bn. The gross proceeds of the disposal were C. £7.6 bn, however the government gifted over £6.5 bn to the newly privatised entities, writing off all existing debt and new money to the water companies to ensure their success.  

According to analysis by the public services international research unit of Greenwich University, the nine privatised companies in England have amassed debts of £48bn since 1989. This debt cost them >£1.5bn in interest each year. 

Furthermore, analysis of Companies House data by the LibDems, shows during this parliament, which started in 2019, pre-tax profits at water companies have climbed by 82%. 

In 2022-23, England’s water firms made £1.7bn in pre-tax profits. This is up 82% since 2018-19, when the same companies made £955m. Since 2018-19, water firms have made £4.2bn in pre-tax profits. 

As much, if not all of these profits are swallowed up by dividends and debt servicing, water companies plan to increase bills by up to 40% by 2030, to pay for infrastructure improvements such as fixing leaky pipes and building new sewers. As an example of their extravagance, Thames Water uses 28% of all water bills to servicing debt. 

The Lib Dem leader, Ed Davey, said: ‘These eye-watering profits are a national scandal. Whilst our rivers, lakes and coastlines get destroyed by raw sewage, these polluting firms are laughing all the way to the bank.’ 
 

‘Whilst our rivers, lakes and coastlines get destroyed by raw sewage, these polluting firms are laughing all the way to the bank’

 
Sarah Olney, the Lib Dems’ Treasury spokesperson, said in parliament: ‘Thames Water is no longer a functioning company and the government has a choice: either bail them out with taxpayer money or listen to our calls to put them into special administration to then be reformed into a company for the public benefit.’ 

Under the updated water insolvency legislation the company can be taken over as a going concern to make sure that water and wastewater services continues. The taxpayer would not be liable for the debts, which would stay with the holding company. 

Thames Water is seeking a shareholder bailout of £2.5bn to the end of the decade to stay solvent, but it wants Ofwat, the water regulator, to allow it to increase customer bills by 40%, pay higher dividends and face lower fines for pollution in order to secure the shareholder investment. 

Thames Water declined to commit extra funds this week to a £180m industry-wide initiative to fast-track efforts to reduce sewage pollution in England’s waterways. Its parent company has been told by its auditors that it could run out of money by April if shareholders do not inject more cash into the company. It needs to repay a £190m loan due in April. 

Special administration can be triggered if a company cannot pay its debts or is not performing its statutory requirements. 

Really, post-privatisation the entire industry has become a total shower. Unfortunately, showers seem to be something lots of children aren’t able to have. Nor, for that matter, are beds, as child poverty spirals out of control, according to headteachers across England. 

Previously it was hungry children, but now the ‘extra-care’ extends to mitigating exhaustion, with increasing numbers of children living in homes without enough beds or unable to sleep because they were cold.
 

‘increasing numbers of children living in homes without enough beds or unable to sleep because they were cold’

 
The head of a primary school in a deprived area in north-west England, said: ‘We have a child who we put in the shower a couple of times a week.’ He described the family’s bathroom as ‘disgusting‘ and said they couldn’t afford to buy cleaning products. 

His school routinely washed uniforms for children whose families didn’t have a washing machine. 

The school recently stepped in to help after discovering a pupil begging outside a supermarket and its free breakfast club was ‘really needed‘. But lack of sleep had become another big symptom of poverty – and a barrier to learning. 

‘We’ve got a lot of kids in homes with not enough beds or a mum sleeping with two or three children‘. Support staff would often take children out of class who weren’t coping because of exhaustion to let them sleep for an hour or two. ‘Some children are falling asleep in lessons, and not just the little ones‘. 

The school had many children living in ‘desperate neglect‘. ‘Kids are sleeping on sofas, in homes with smashed windows, no curtains, or mice,’ he said. ‘I come out of some of these properties and get really upset.’ 

A report published on Friday by the Child of the North campaign, led by eight leading northern universities, and the Centre for Young Lives thinktank, warned that after decades of cuts to public services, schools were now the ‘frontline of the battle against child poverty‘, and at risk of being ‘overwhelmed‘. It called on the government to increase funding to help schools support the more than 4 million children now living in poverty in the UK. 

Anne Longfield, founder of the Centre for Young Lives and the government’s former children’s commissioner, said: ‘The government has dismantled public services over the past decade and schools are the last people standing. They need proper support to tackle child poverty.’ 

Problems of this nature don’t happen by accident, they are the result of government policy, which, in itself, is a reflection of their priorities, a subject we have covered before in ‘A Tale of Two Priorities’, ‘Priorities, Dear Boy, Priorities’. 

The £8bn that the chancellor just tossed away with his pointless cut in NIC, could clearly have been put to much better use, than a somewhat flawed attempt to appease the party’s right-wing and buy a few votes. 
 

‘The £8bn that the chancellor just tossed away with his pointless cut in NIC, could clearly have been put to much better use’

 
Unfortunately, the problems highlighted above are symptomatic of a much wider issue, inequality. 

The head of the IMF, Kristalina Georgieva, has warned that the only way to boost global economic growth over the next century is by tackling soaring inequality to achieve a ninefold increase in living standards. 

‘We have an obligation to correct what has been most seriously wrong over the last 100 years – the persistence of high economic inequality. IMF research shows that lower income inequality can be associated with higher and more durable growth’. 

‘We simply cannot get to the ‘high ambition scenario’ for growth unless we foster a fairer global economy.’ 

In a speech at King’s College, Cambridge, she argued the world was a turning point, making a comparison with the Great Depression of the 1930s, and that the proceeds of growth had been too heavily concentrated among particular groups and in rich countries 

In conclusion, the country is in limbo, we have a lame-duck government even allowing for their majority, which lurches from crisis to crisis.  
 

‘the country is in limbo, we have a lame-duck government even allowing for their majority, which lurches from crisis to crisis’

 
It took the PM more than 24 hours to concede that comments made by the party’s biggest donor – suggesting Diane Abbott be ‘shot‘, and that the Hackney North MP made you ‘want to hate all black women’ – were, in fact, racist. But after Hester said sorry, it was decided that possession is nine tenths of the law and we are clinging on to his £15m. 

Then there is the desperation of offering people denied asylum up to £3,000 to ‘encourage‘ them to move to Rwanda, a scheme that, to quote the Labour peer Stewart Wood, suggests ‘a government that is so determined to nail the people traffickers that it has decided to subsidise them‘. Really, this is just a desperate roll of the dice, trying to placate the hard-right and buy a few votes at the expense of refugees and minorities. 

In addition, they have nothing new to offer other than stealing headline pledges from Labour, such as the  windfall tax on the fossil fuel companies and taking away non-dom tax status.  

Aside from loosing two vote winners, labour have to continually defend their ability to manage the economy which is regularly attacked by the Tory media, as a result Labour have dropped their annual £28bn of green investment. The £2bn that Reeves had planned to relieve non-doms of which would have benefitted the NHS  and schools has been squandered on funding part of Hunt’s cut in NIC, with the balance coming from yet more spending cuts. 

This dystopian nightmare more and more resembles the end of the Third Reich with every passing day 
 

‘Ganz tief unten, wo es kein Licht mehr gibt 

Hexensabbat regiert die Nacht’ 

Notes: 

1. FactSet 

 
A relentlessly grim picture from Philip in his opening salvo this week; familiar themes, but a deteriorating picture.

It prompted me to revisit columns ‘passim’ and conclude that Philip’s conclusions are rarely anything other than spot-on, but that, as a potential B-side to D Ream’s anthem, things have only got worse.

Revisit all previous columns here >

‘One wonders what misfortune will befall the government this week.

Two weeks ago we had Lee Anderson “wanting his country back” and defecting to Reform

Last week it was all about Frank Herter and his opinions, and the small matter of £15, in donations. Rishi did eventually concede that Hester’s comments could be seen as racist, but it was OK because he has a racially diverse cabinet.

To start this week Rishi has decided that Frank is OK because he said sorry. Better still they are using this contrition as a means to keep the filthy lucre. But the week is still young….

Perhaps Rishi should be looking to Russia for ideas.

Vladimir Putin, to everyone’s surprise, won a landslide victory with 87% of the vote! Amazingly, 74% turned out to vote in a one-horse race – the highest in history

It is reported that the Kremlin spent close to €1bn on the election campaign, with funds overwhelmingly devoted to ensuring a large turnout. It was not enough for the Kremlin to win the election – it also had to demonstrate public engagement. There was a push for early voting, especially in the occupied territories in Ukraine, where electoral officials accompanied by armed men in uniform knocked on people’s doors and politely asked them if they would like to vote early. Those who did not yet have Russian passports were allowed to use their Ukrainian IDs. In Russia there were the usual raffles, discos and canteens at polling stations to entice people out. Gove would love that, trance and pills free at each voting station!

Of course, things don’t always go to plan: On 17 March 1985, Romania’s brutal dictator, Nicolae Ceaușescu, was re-elected with 100% of the votes of the rubber-stamp parliament, which had in turn just been re-elected with nearly 100% of the popular vote. Four years and nine months into his term, revolution toppled his regime, and he was shot dead by his secret police.

Musically, we start with Smokey Robinson’s “Tracks of my Tears”, about lost love, or in Rishi’s case a possibly lost £15m. To finish we have Xmal Deutschland with “Incubus Succubus”>”. The following story about the band seems particularly apt….

They travelled to London and were signed by 4AD, and found that the city’s punk scene was vastly different from their Hamburg microcosm. “[West] Germany in those days was a very rich country,” Anje Huwe, the singer, said. “But Britain was different, it was pretty run down!” Enjoy!

@coldwarsteve
 

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Philip Gilbert is a city-based corporate financier, and former investment banker.

Philip is a great believer in meritocracy, and in the belief that if you want something enough you can make it happen. These beliefs were formed in his formative years, of the late 1970s and 80s