STOCK MARKET WEEK : Institutions left awash with cash following a flood of buy-backs
Monday 24 February 1997
Last week alone, banking giant Barclays, advertising agency WPP, leisure conglomerate Rank Group and haulier Christian Salvesen all unveiled plans to repurchase shares worth a total of almost pounds 1bn.
The received wisdom is that a net injection of liquidity from buy-backs is good for the stock market. Certainly share repurchases have been a significant factor behind the rise and rise of the US and, to a less obvious extent, the UK markets.
But there are signs the initial enthusiasm for buy-backs is beginning to wear thin. Shares in Barclays, for example, still fell sharply after its results last week, despite suggestions that another repurchase of its equity was on the cards.
While buy-backs are a response to the problem of what to do with surplus cash in a low interest rate environment, they are also an admission that companies can think of nothing better to do with the cash in business terms than to give it back to shareholders.
"In itself, that is not a positive message to be putting across," stockbroker Charterhouse Tilney argues in its latest review. The involuntary increase in liquidity comes at a time when institutions are already awash with cash - double the normal proportion of total assets, Charterhouse says.
Some of this should be mopped up by imminent building society and mutual assurance flotations, while cash-strapped companies may come cap in hand to take advantage of available liquidity through rights issues.
That said, government funding, through tapping the gilts market, is falling as the public sector borrowing requirement improves, leaving investors wondering where to park their cash.
Overall, it looks as share buy-backs in themselves do nothing to resolve the underlying problem that the return on cash is low. The problem, Charterhouse contends, is merely transferred to fund managers.
Whether this week will see more buy-backs announced remains to be seen. What is clear is that a veritable spring tide of company results, led by financials, will engulf investors this week but with the London stock market testing its record high-water tide-mark any disappointments could leave shareholders high and dry. Friday's profit-taking among financial stocks may be a foretaste of things to come.
Adverse currency factors could cause more than a few ripples of concern. Among the insurers, a buoyant life sector has lifted shares in Commercial Union to new highs in recent weeks. But NatWest reckons CU is vulnerable to profit-taking with the shares standing at 16 per cent premium to their net asset value and vulnerable to profits downgrades given sterling's further gains against continental currencies since the December year-end. Underlying operating profits to be unveiled on Wednesday are expected to show a fall from pounds 509m in 1995 to anywhere between pounds 415m and pounds 465m.
On the same day Prudential posts its 1996 figures. While these should be perfectly acceptable - operating profit up 10 per cent at pounds 885m - the main focus of attention will be on what the Pru has to say about its pounds 1.9bn bid for Scottish Amicable, which rival Abbey National, reporting the next day, has promised to trump in what has become a out and out auction. ScotAm has given its various suitors until Friday to come up with their final indicative bids.
Abbey, too, should produce a double-digit improvement in profits with NatWest pencilling in pounds 1142m (pounds 1026m) at the pre-tax level. However, the broker believes the valuation of both shares is looking stretched after their strong performance in recent months.
Just as topical will be final results from Standard Chartered on Wednesday. The bank's prospects for earnings growth are underpinned by market conditions in Hong Kong, so its assessment of how the death of Chinese leader Deng Xiaoping will affect the colony's handover to Peking this summer will be watched with extra interest. Strong growth in Standard's core Asian franchise should enable pre-tax profits to jump by about a third to pounds 875m.
Still in financial services, profits from high-street clearing bank NatWest are set to fall by 35 per cent to around pounds 1135m, reflecting a number of one-off factors. These include a pounds 690m accounting loss on the disposal of Bancorp, the US commercial and retail banking arm, and a special restructuring charge of pounds 206m to be partially offset by a pounds 224m gain on the sale of NatWest's stake in 3i, the venture capital group.
Also on Tuesday, operating profits at Guardian Royal Exchange could fall by up to a third to pounds 240m as the composite insurer incurs hefty restructuring costs from integrating recently acquired businesses.
Full-year results from British Aerospace on Wednesday are likely to reflect the huge financial strides made by the company over the past few years as the civil and defence markets continue to consolidate.
Analysts expect positive news about a growing defence order book, rising profits from the European Airbus consortium and reduced losses from regional aircraft. Pre-tax profits should come in around pounds 440m versus pounds 330m last time.
The lights will finally go out on British Gas on Thursday. Its last set of results will be something of an irrelevance as the company has ceased to exist following the demerger into Centrica, the domestic and industrial gas supplier, and BG, the pipeline arm. Assuming the opportunity is taken to wipe the slate clean British Gas could even make a loss after exceptional items.
It will also be the end of an era for Redland today when the building materials group is ejected from the FTSE 100 index. It will be replaced by Energy Group, one of the businesses born of the Hanson demerger which includes Eastern, the regional electricity company. The Hanson rump will remain a FTSE 100 constituent.
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