MD writes...


Three topics readers interested in investing in UK plc might consider going forward into 2005:

Cash Flows
It is alleged that UK plc cash flows are very strong and that cash is piling up. Well, maybe. The Times ran a stupendously fatuous piece yesterday 28/12/04 entitled “UK plc builds up cash pile” by Gary Duncan. Under a graph entitled Leading Cash Rich Companies he chose to measure high free cash flow as a percentage of enterprise value. Knock me over with a feather – since when was this a recognised measure? Still, what do I know - the widely ridiculed EBITDA is still regularly quoted as well. Clearly the article / idea was planted by the scientists at the “investment banks”. Stars were M&S, BAE, and others no doubt all being touted as buys or takeover plays in 2005.

Share Buy Backs
The saddest statistic I’ve seen recently (also in The Times 28/12/04) was biggest share buy-backs of 2004 and I quote:

Vodafone £3,268m
BP £2,894m
M&S £1,755m
GSK £1,100m
AstraZeneca £1,099m
BAT £1,036m
Centrica £1,000m

Some of these companies sold part of the family silver to do this. But to what end? Note also that the much maligned Shell is no where to be seen on this list. Yet, despite its troubles, Shell is up 9% on the year vs. BP at 14%. BP Amoco is supposedly the better run company and has not had the reserve crisis of its rival. However, I question if £2.9bn is worth the candle. Certainly, pension fund trustees at some of these firms may have their doubts that buy-backs are the best use for "surplus" cash.

Shares are typically issued for 3 reasons, viz; to buy a company; to get out of gaol (otherwise known as remedying past mistakes); and to further reward already overly-well rewarded directors and senior staff. Let anyone who says that they have no cost study the above statistics.

Dividend Cover
I’ve taken a look at UK plc dividend cover. In contrast to the cash flows optimism noted earlier it makes sorry reading. When the scribe was lad it was a rule of thumb that sufficient dividend cover was not less than 3x. Here’s a surprise: hardly any of the FTSE 100 are anywhere near 3x covered. Most hover between 1 and 2. Bloody hell! Not much being held back for investment, nor for rainy days. Another price to pay for share buy-backs?

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