Dividends Slashed, Investing for Income, NMC Health and Finablr

Many companies are announcing cancelled, reduced or postponed dividends – two of the latest were Shell (RDSB) and Sainsburys (SBRY). This will hit investors hard who rely on dividends for retirement income. But should they be doing so?

Terry Smith of Fundsmith had an article published in the Financial Times today under the headline “Investors: never let a crisis go to waste” in which he attacks income funds. In particular he questions whether the Investment Association should allow funds with “income” in their name to only have a yield greater than 90% of the average fund yield, i.e. less than the average! Even that requirement has now been suspended for 12 months. Terry calls this a “ridiculous piece of deception” and I can only agree.

If you invest in individual shares, there is a strong temptation in times of stock market crises to run for the hills and start buying what are viewed as defensive businesses with high dividend payouts. You argue that the dividend yield will keep the share price up even if all other news is bad. But this is a fallacy. All you do is put yourself at risk of a sharp decline in the share price when the dividend is chopped.

As Terry Smith also pointed out in his article, dividend cover in many companies that are on high yields are inadequate. In reality they are not maintaining the businesses, or certainly not growing it, by not investing enough of their profits back into the business. Sometimes it indicates that they are operating in a declining sector and many have an abysmal return on capital. Should you really be investing in such companies is the question you should ask yourself?

The simple rule should be: Never invest in a company solely for the dividend. Invest in it because it is a quality company with positive prospects and management dedicated its long-term future for the benefit of all stakeholders.

I have mentioned NMC Health (NMC) and Finablr (FIN) in previous blog posts along with many other frauds. It’s not that I am trying to put off people from investing in the stock market which is one of the main sources of what little wealth I have. Likewise when I criticise those who invest in income funds or high yielding shares. But my desire is to educate people about how to get positive rather than negative results. NMC and Finablr have both been chaired by Dr B.R.Shetty and he made a rather surprising comment in a letter which was published by Finablr yesterday. He said: “The preliminary findings provided by my advisors from my own investigations indicate that serious fraud and wrongdoing appears to have taken place at NMC, Finablr PLC (‘Finablr’), as well as within some of my private companies, and against me personally. This fraud also appears to have been undertaken by a small group of current and former executives at these companies”. He goes on at some length on how the frauds were committed. This all sounds rather unlikely but we will no doubt see in due course whether what he says is true.

The shares of both companies are currently suspended and NMC is already in administration. Finablr also had this to say: “The results of this exercise currently indicate that the total net indebtedness of the Finablr Group may be approximately $1,300 million (excluding any liabilities of the Travelex business). This is materially above the last reported figure for the Group’s indebtedness position as at 30 June 2019 and the levels of indebtedness previously disclosed to the Board. The Board cannot exclude the possibility that some of the proceeds of these borrowings may have been used for purposes outside of the Finablr Group”.

The outlook for shareholders in both companies looks very bleak indeed. Let us hope that the investigation of these frauds is quicker than it normally is, but I doubt it will be. The larger and more complex the company, and the bigger the fraud, the longer it takes regulatory authorities to pin the tail on the donkey. Think of Polly Peck for example.

As I said in my previous blog post that mentioned false accounting at Lookers, “Such events totally undermine investor confidence in the accounts of public companies and suggest much tougher action is required to ensure accounts reported by companies are accurate and not subject to fraud or misrepresentation”.

For investors the motto must be ““Let’s Be Careful Out There” (as said by the sergeant in Hill Street Blues) because the financial world is full of shysters. You need to research companies as much as possible before investing in them, but even that is not fraud-proof unfortunately. Only improved regulation and accounting can really solve the problem of corruption in the financial scene.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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