Too Much Dividend can be a Turnoff, say Investors

European Companies – Highest Amount of Dividends

European companies have been paying the highest amount of their earning by way of dividends in over 40 years fuelling fear among analyst on whether such kinds of pay-outs are viable. Investors have for a long time dealt with queries of what companies need to do with the escalating cash load, to return it to shareholders or spend it on technology, research and development, top staff or bolting on new business for the future growth.

For the past five years income-hungry investors received dividends from the European firms and the pay-outs offered a solution to the combination of sluggish economic growth, aggressive central bank policy, enabling what had pushed bond yields to record lows and changing stock markets.

However, the growing cut off between earnings as well as dividends together with worries which companies would be adding debt to fund the shortfall was urging a reconsideration of this proposal. Senior research manager at S&P Global Market Intelligence Julien Jarmoszko stated that they were seeing a lot of companies trapped into their dividend policy.As per Thomson Reuters’ data, almost 60% of Europe Inc.’s earnings per share had been returned to the shareholders as dividends.

Cautionary Sign to Companies – Investors to Stop Rewarding Capital Returns

Companies’ partiality regarding dividends is in no small amount fuelled by investors encouraging companies to part with cash due to restricted opportunities for capital spending. However a shift is in progress. Last month’s Bank of America-Merrill Lynch survey of global fund managers, in one of the cautionary sign to companies that tend to borrow to fund buybacks and dividends, had suggested that investors may stop rewarding capital returns to the same degree as done earlier.

Net percentage of fund managers saying pay-out ratios to be `too high’, had been at the highest level since March 2009. Fund managers instead are progressively searching for earnings and rewarding companies which are either reinvesting back profits in order to expand their business or those which have cut pay-outs to protect their balance sheets.

Tim Crockford, lead manager of the Hermes Europe Ex-UK Equity Fund had said that they like companies which do not essentially pay too much of their cash flow out since they have good opportunities of investing in fixed capital, generating higher returns in the future through these investments.

Leaner Balance Sheets Indicates Substantial Shift

Crockford pointed out Spanish Technology Company Amadeus IT and German laboratory equipment company Sartorius as good examples. For instance, Amadeus had spent money for investment in its IT business, making the services of the firm much more appealing to customers like airlines.

In the meantime, some commodity connected firms that had cut dividends in an effort todeal with the slump in metals prices had seen their share prices gathering. Glencore that had lost more than half of its value last year before suspending dividends in September, had profited by 13% since then. BHP Billiton had gained 30% since cutting its dividend in February.

The inclination of accepting lower or no dividends in favour of leaner balance sheets indicates a substantial shift. Besides, it would also signal to European firms that attempts to spend on themselves and getting in front of a pickup in growth would be compensated while stubborn reliance on pay-outs would not.

BHS Collapse - Pension all you Need to Know

Credit: Dominic Lipinski/PA Wire

Defined Benefit – DB Scheme

Employees provided with financial security when they tend to retire seem to bea useful aim for liable company.Several of Britain’s biggest firms have set up defined benefit – DB pension schemes over the years, which tend to reward the staff based on how much they seem to earn and how long they work. There are around 12 million active members in Britain during the heyday of the DB pension in the 1960s and 70s and it was clear that companies could not afford to support so many people in this way for decades after they had finished working and the long period of strong stock markets had concealed the worst of the problem in the 1980s.

Towards 2007, there were only 2,240 open DB schemes with an addition of 6,250 still paying out though closed to new members. This relates to more than 38,000 less generous defined contribution schemes. As for companies which are left with the gold-plated pensioners, even if they tend to have adequate funds to pay them, the long-term liabilities could be bigger than the business. The RSA insurance firm is just one FTSE 100 firm where its pension fund is many times larger than its own £5bn value of the market.

Pension Fund of Company Has a Deficit of £157m

When a company tends to get ruined, the first thought should be for the workers who will not only lose their jobs but their retirement income could also be at risk. Often a trouble company tends to have pension deficit and so it is the case with BHS, a respected British retailer that has been overtaken by changes in fashion. The present workforce at BHS of about 11,000 is dwarfed by the 20,000 people qualified to claim a pension.

The scheme has resources of over £400m though its deficit between its resources and disabilities is over £200m. It is estimated that the pension fund of the company has a deficit of £157m. Though the company had been struggling financially for some time, it has gone into administration which is a process wherein a company is controlled by a licenced professional who tends to run it in a way protecting creditors as well as the company directors. Presently administrators Duff and Phelps have been running BHS as going concern and if it does not discover new owners, it could begin the process of realising its assets to cope up with its debts.

Possible Buyers Apprehensive

As of March 31, 2015, the company is said to have £435m of pension assets which indicates the scheme was less than 50% subsidized. It is assumed that Sports Direct had held talks regarding buying some of the 164 stores of BHS together with a number of other retail chains who have expressed interest in purchasing part of the company or its estate. However possible buyers are apprehensive by the £571m pension deficit of the firm.

The Pension Protection Fund which was set up in 2005 tends to use an annual levy charge to all companies with DB schemes in order to support the one whose corporate sponsor tends to fail. The PPF has 220,000 current as well as prospective pensioners on record and intends to be self-funding by 2030. Rescue of BHS’s pension is set to be among the top ten largest deals though comfortably within the financial abilities of the lifeboat.

Yellen The US is not a ‘Bubble Economy'

Yellen – Rebuffing Political Rhetoric – Bubble Ready to Burst

Janet Yellen, Federal Reserve Chair had touted recently on the strength of the United States economy, rebuffing political rhetoric recommending a bubble was ready to burst. Yellen noticing a healing labour market and a 5% headline unemployment number, had commented, `I certainly wouldn’t describe this as a bubble economy. Yellen had been on a panel with the earlier Fed Chairs Ben Bernanke, Paul Volcker and Alan Greenspan at the International House in New York and the U.S. central bank heads had discussions on the U.S. economy as well as monetary policy all over the world.

Yellen’s comment came soon after the Republican presidential contender Donald Trump’s disagreement that an economic bubble would erupt. She noted that she did not see `imbalances’ like `clearly overvalues’ asset prices. Though Volcker acknowledged that he saw some overextended pieces of the financial system he agreed stating that he does not believe that a bubble exists. Yellen adds that the global economy has been seen as a comparatively weak growth inspite of the positive signs in the U.S. Restrained approach had been taken by the Fed on raising interest rates this year after raising its target for the first time in almost a decade, in December.

Fed to Watch Carefully – Occurring in Economy

This year the policy committee of the bank now tend to project two rate hikes. Yellen has stated that she does not consider the decision taken in December as a mistake, since indicators during that time portrayed substantial progress towards the Fed’s labour market as well as inflation goals. Going ahead, he noticed the Fed would watch very carefully what is occurring in the economy.

The Fed had dealt with drooping global economy and U.S. inflation below its target, since it decides on how quickly to increase rates. The tightening path of the Fed came as other central banks all over the world including those in Europe and Japan tend to have eased. The policy committee would meet next on April 26 and 27. Some of the observers of the Fed have quizzed on how the central bank would react to a probable recession with policy already accommodative.

Yellen’s Comments – U.S. Stock Market Futures Dropped

On Thursday, Bernanke noticed that the fiscal policy `does not have a role to play’ on top of monetary policy. Greenspan added that the monetary policy should not have the whole load of battling an economic slowdown but he warned against creating more debt with increased government spending.

Yellen had also addressed a recent crusade by Minneapolis Fed President Neel, Kashkari who had floated breaking up large banks to increase financial system stability. She had observed that she shared the concern of Kashkari regarding ending firms’ `too big to fail’ status. However, she stated that the policies such as capital and liquidity needs and stress tests have improved the safety and soundness of the banking system. She commented that she feels more positive on the progress made.

She was also of the belief that the issue is within the purview of Kashkari, noticing that the decentralized structure of the Fed enables independent views. In the wake of Ms Yellen’s comment, the U.S. stock market futures dropped as traders processed signs from the Fed chairman that she would be willing to follow increases in interest rates in the future.

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UK Inflation Rate Stays at 0.3%

UK Inflations Unchanged at 0.3%

According to the Office for National Statistics – ONS, UK inflation, measured by the Consumer Prices Index remained unchanged at 0.3% in February. There was a big rise in vegetables though the transport cost had dropped as per ONS. The annual inflation was below the target of 2% of Bank of England for two years and last year it had been zero. Last month the Bank had stated that it predicted inflation to remain below 1% this year.

Other figures of ONS published at the same time showed that Chancellor George Osborne had been close to missing his target in cutting the budget deficit of the country in 2015-16 financial years. According to ONS, borrowing of the government dropped than anticipated in February which brought the overall deficit so far to £70 for the 11 months of the year, as against the chancellor’s full-year target of £72.2bn.

The borrowing figures could mean that the government could borrow on additional £1.5bn this month if it intends to avoid exceeding the forecast set by the Office for Budget Responsibility during the last week’s Budget. Recent ONS’s release revised January’s borrowing by 2.6bn and even though next month’s figure exceeds the forecast, there is a possibility of waiting longer for confirmation.

Difficulties in Implementing Some of the Planned Budget Cuts

Chief economist at the British Chambers of Commerce, David Kern, stated that while there is a gradual progress in reducing the deficit, the timetables outlined in the Budget last week tends to be ambitious and the return to surplus could take a bit longer than the chancellor hopes.

He further added that `the difficulties in implementing some of the planned budget cuts would increase the problem’. Under the single Retail Prices Index – RPI measure including housing cost, inflation was 1.3% in February, which also remained unchanged from the previous month. According to the ONS, the biggest downward pressure on the inflation rate was from the transport segment with the changes in prices for items like road passenger transport, second hand cars and bicycles.

There was a drop in prices for toothpaste together with other personal care products, though higher prices for vegetables, milk, eggs and cheese compensated for those declines.

Britain’s vote on European Union Membership – Hit UK Economic Growth

An increase was also seen in hotel accommodation and restaurant bills along with the price of furniture as well as household equipment. Lower oil prices kept a cover on inflation leaving the central bank in no haste to increase the rates beyond 0.5% which remained there for almost seven years. The unmoved level of inflation of February comes after three months of increased consumer prices.

 Clothing prices had been up by 0.4% when compared to last year while gas prices had dropped by 6% over the same period after energy giant E. ON’s decision to reduce the cost of gas by 5.1% for two million customers last month. The inflation announcement was made after the Bank of England had voted to maintain the rates on hold once more this month and cautioned that Britain’s vote on its European Union membership could hit UK economic growth.