Derek Pain: With shares, tiny acorns do not grow at all

No Pain, No Gain

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The Independent Online

I wonder how many small shareholders, through no fault of their own, find themselves lumbered with tiny shareholdings that are of little use to man or beast. It is not at all unusual for takeover bids, consolidations and buybacks to erode the value of shareholdings. If a relatively small sum has been invested these stock market manoeuvres can, in effect, kill off investments with shareholders just innocent bystanders.

Of course, evasive action is sometimes possible.

Investors might be able to sell what is still a realistic stake ahead of dilution and, if such a chance fails to occur, there is always the possibility of topping up shareholdings. But that could involve throwing good money after bad.

Another avenue that is worth pursuing is to sell any remaining tiny stacks of shares. Although the cost of such actions will almost certainly ensure they are loss-making exercises, such sales can always be used to set against capital gains tax, assuming it exists.

I feel the needs of small shareholders are often overlooked when a company indulges in capital exercises. Even if the basic intention is to spread a little cheer, it can have disastrous consequences for the little guy. Take share buy-backs from shareholders. I realise that in these straitened times they are not so popular as they were in the free-and-easy days a the beginning of this century. In those days when cash was plentiful and many businesses were happy to take on fresh debts, the flow of buy-backs abounded, with some companies — claiming they were in fact returning cash to shareholders — indulging in the exercise more than once. Yet such actions could leave a small player stuffed with a piddling interest. Special dividends are far more appropriate.

Share consolidations, particularly when firms are in difficulties, are another way small shareholders can lose out. In my experience it is also not unusual for companies to perform a number of consolidations when, for example, 100 shares become one. Sometimes a good case can be made for such brutal treatment, even though it often leaves shareholders with an unrealistic holding. Occasionally rumps are forcibly sold with the proceeds going to charity.

I dread to think about the value the no pain, no gain portfolio would still have in Green Compliance if it had held on after consolidations and share issues. It retreated in 2009 with just £200 left of its original £5,000 stake. Since it sold out Green's shares have fallen from around 200p to, as I write, 8p.

Takeovers can also leave shareholders with tiny stakes. An unhappy example was provided by another former portfolio constituent, a support services company called MacLellan. When it was bought by rival Interserve in 2006, a mix and match cash and share offer was adopted. But with so many MacLellan shareholders asking for cash, the money element was exhausted. So many shareholders had to settle for some cash and a few Interserve shares. For example, anyone with 1,000 MacLellan shares collected £806 cash and 92 Interserve shares (now worth £355).

There are other ways small shareholders suffer through share manoeuvrings. It is not unknown for a smallish share interest to be wiped out in a capital reshaping exercise. I believe merchant bankers when they dream up capital re jigs — and the compliant company directors — should give a little more thought to the needs of the small player. I don't suppose they ever will. Most regard us little'uns as costly inconveniences. The City thrives on big guns and has trouble tolerating small shareholders.

The portfolio would be regarded as a small shareholder in the Whitbread leisure group. Last week this constituent reported upbeat interim results. But a warning that second-half growth would become more moderate curtailed enthusiasm for the shares that had earlier touched a 2,400p peak.

Group revenue was up 14.2 per cent with underlying pre-tax profits 10.6 per cent higher at £193.4m. And for good measure the half yearly dividend is 19.4p a share against 17.6p. Total dividends paid by British companies in the third quarter of the year were a record £23.2bn. Capita, the registrars that keeps track of these payments, reckons the year's total will hit £76.6bn.

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