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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Equals Trading, Bango Results, Finablr Suspension, Baronsmead VCT and Closing the Stock Market

As share prices of almost every share on the market collapses, should all trading be suspended? The argument for this is that as the impact of the coronavirus on the economy is not certain, although it looks more dire every day, shares cannot be valued with any certainty. Indeed there seems to be no hiding place as there never is in a bear market – almost all share prices have fallen. The editor of the FT thinks the market should not be closed and I agree with her. Closing the market is very prejudicial to private shareholders, particularly those who absolutely need to move into cash even if it means some sell into an unrealistic market – but that is their choice. If the market closes you have no choice. If there was to be a closure, it should only be for a few days as at the start of World War II.

I have been trend following in the market as I have mentioned before but it has proved difficult to keep up in the last few days. At least brokers’ systems seem to be robust this time around.

The major sectors affected by the virus, or soon will be, are hospitality businesses, hotels, pubs, entertainment venues and airlines. One symptom is that I just cancelled our holiday in June as I am supposed to be hibernating for 12 weeks according to the Prime Minister and I doubt the epidemic will have passed by June. But you can see that there will be many staff lay-offs in such businesses and airlines are already asking to be bailed out by the Government because if airplanes don’t fly they cannot cover their aircraft lease costs.

Meanwhile the virus is causing businesses to get their staff to work from home, including one of my brokers. Payment company Equals Group (EQLS) issued a statement this morning giving their response to the virus and a trading update. They say they have 50% of their staff working remotely in shifts and can move to 100% when required. As regards trading, group revenues to the end of February were up 33% but there has been a marked slowdown in travel cash and retail card revenues in the last week due to the adverse impact on travel. But corporate revenues are still robust so far and account for the majority of revenues. Clearly the business will be impacted to some extent so they are cutting costs to conserve cash. The share price had anticipated this and had already fallen a long way in previous days and weeks – it fell again today.

Another company in the payments sector is Finablr (FIN) which announced yesterday that the shares were suspended. The company suggests that problems with liquidity are making it difficult to manage the business. They have also discovered some cheques dating back to before their IPO which have been used as security for the benefit of third parties – a small matter of $100 million is involved! The CEO has resigned and the board is looking for a new one. This company was founded by B.R.Shetty who also founded NMC Health and whose accounting and financing arrangements are also under scrutiny. It looks like Finablr is yet another financial disaster I have managed to avoid to look on the bright side. I would not bet on shareholders recovering anything. Temporary suspensions very frequently turn into permanent ones.

Another company that operates in the mobile commerce and payment sector is Bango (BGO) who issued their final results today. Group revenue was up 41% and they say “Adjusted EBITDA” for the year was a positive £0.45 million. However cash declined because of the large expenditure on intangible assets and there was still an overall financial loss. They expect the “payments business to continue to grow exponentially” and they forecast the coronavirus to have a positive impact on End User Spend as from experience they see consumer spending rise during “stay-at-home” periods such as Ramadan and Christmas. The share price rose slightly today by the time of writing this note, but investors are still unsure about the future of the company it seems. Investors are either taking their money off the table altogether or moving out of businesses likely to be impacted by self-isolation and quarantining and this is having a very wide impact.

My portfolio is now over 25% in cash which is very unusual but I am picking up the odd few shares in companies where the panic seems overdone – in none of the sectors likely to be affected that are mentioned above though.

One of the few companies I hold whose share price rose in the last 2 days has been Ocado (OCDO) as the popularity of on-line ordering and delivery rises. Getting delivery slots with them is now difficult for customers and other supermarkets are having similar problems and when you do get a delivery a lot of items are missing. There is clearly some panic buying going on for certain items which may subside if logistics turns out not to be a major problem after all. But surely all the workers who pack and delivery from supermarkets are going to be affected if the virus becomes rampant, even if they are in the younger and healthier group.

I mentioned some issues at the Baronsmead Venture Trust (BVT) AGM in a previous blog post (see https://roliscon.blog/2020/02/27/venture-capital-trusts-the-baronsmead-vct-agm-and-political-turmoil/). I wrote to the Chairman of the company, Peter Lawrence, after the meeting and have received a response. He confirms that the chart of returns in the last ten years in the Annual Report on page 3 was wrong. It showed a decline in NAV Total Return in 2018 when there was in fact an increase and the 2019 point was also wrong– a corrected graphic is below.

Baronsmead Venture Trust Corrected Chart 2020--03-17

It always surprises me that there are so many errors in Annual Reports that shareholders find easy to spot when the directors have not. This seems to be a particular problem in VCTs – perhaps too many jobs and not enough time allocated to each role with some VCT board directors considering their directorship a sinecure that requires little thought or effort. I suspect those are the problems. Perhaps they need reminding to read the Annual Report in detail before approving it!

Mr Lawrence rejected my complaint about the lack of time allocated to public questions at the AGM Meeting (only 15 minutes) and also rejected my complaint about the length of time he has been on the board which is contrary to the UK Corporate Governance Code. I will send him a stiff reply. To my mind this looks like one of those VCTs where a revolution is long overdue. It needs a fresh board and a good examination of the investment policy, the fund manager and the fees paid to the manager.

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

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