In ordinary times, a company founder whose firm increases its profits and share price for investors deserves to be handsomely paid. It’s called capitalism.
But for housebuilders like Berkeley, these are far from ordinary times.
Since Tony Pidgley agreed the targets for his share-based bonus scheme back in the dog days of 2009 government and central bank policy has come together to do more to bolster his industry’s profits than ever before. Forget capitalism, this has been old-fashioned state support.
Thanks to the taxpayers’ money pumped into the Help to Buy scheme supporting loans for first time buyers, housebuilders have been able to sell nearly 50,000 new homes. Every taxpayer’s pound lent through this system is a pound of revenue in a housebuilder’s pocket.
The impact of the scheme on the property market has been far wider than that, though. It sent a clear message from the Government to the whole country: we will not allow house prices to fall. The best policy message a housebuilder could dream of.
Meanwhile, the Bank of England has pushed through years of quantitative easing (QE) and sustained record low interest rates. This has had the double impact of making mortgages so cheap that Mr Pidgley’s customers can afford to pay Britain’s exorbitant house prices while also boosting property prices as an alternative to low-yielding investments based around bonds.
Mr Pidgley has clearly not screwed up – far from it: Berkeley is a well-run business at the top of its game. But only a part of the company’s success over the past five years is truly down to him.
When executive bonus payments were based on pre-recession share prices deemed unachievably high, many companies “rebased” their targets to make them less challenging. Surely in sectors like housebuilding, the reverse should now be done on schemes devised when the market was uncharacteristically weak.
Meanwhile, given the nation’s housing shortage, it would be nice if executives were paid by the number of homes they got built.
$30bn of Buffett’s money says Meggitt is on track
Just as Rolls-Royce is going through one of its periodic self-inflicted crises, its smaller aero engineering peer Meggitt is powering through mostly blue skies.
Days after investors cheered a humdinging set of profits from selling its prime British kit to the world’s biggest aircraft makers, Meggitt has announced a $200m deal to boost its aero business further.
Okay, for what is now a FTSE-100 company, this is hardly going to create a sonic boom, but it highlights a sense of optimism at a company rapidly developing national champion status in our manufacturing sector.
The businesses it bought yesterday from Cobham (another UK champion) make high-tech composite materials in the East Midlands capable of withstanding vast temperature extremes. Perfect for bits like the protective dome on the fuselage that covers wi-fi antennae on an increasing number of planes these days.
Wi-fi aside, it’s currently mainly used in military aircraft, signalling that Meggitt management is less gloomy about the outlook for government defence spending than the market might be. Barack Obama has signalled an 8 per cent US rise next year and globally budgets are on the turn.
Meanwhile, the big plane makers – military and civilian – all say they want to be able to deal with a smaller number of bigger suppliers. Good news for consolidators like Meggitt.
That’s not to say there’s nothing to fret about with this company. Like most major engineers, Meggitt has a significant chunk of its business tied to the oil and gas industry, mainly LNG. You’d have to be contrarian in the extreme to predict any rapid improvement there.
But hang on, what’s this?
That embodiment of being brave while others are fearful, Warren Buffett, has just struck his biggest takeover deal ever in precisely Meggitt’s markets of aerospace and energy.
His $30bn-plus potential deal for Precision Castparts represents the world’s biggest gamble on continued demand from the likes of Boeing and Airbus, plus hope of a longer-term rally in oil.
Tesco aside, Buffett is rarely wrong. Meggitt, and other UK engineers, take heart. Investors are coming your way.
And now, monsieur, some Clydesdale Bank shares?
Come the end of the year, investors will be feeling, like Monty Python’s Mr Creosote, overstuffed with bank shares.
Lloyds will have sold them a further 8 per cent of its stock, RBS will have shoved in billions of pounds worth more, and, as it said yesterday, National Australia Bank will have floated off its Clydesdale banking arm.
It doesn’t stop there, of course. Next year, as well as selling more of itself to the market, RBS must persuade punters to buy in to its artificial creation Williams & Glyn – a bank being carved out from its existing network at the behest of monopoly regulators.
With all of the above now likely to be hit with a renewed bout of PPI misselling payouts, one wonders if we are close to hitting the “waffer thin mint” moment for fund managers’ appetites.
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