ne company has got it very, very wrong. Everybody in the industry is as peed off with this Persimmon thing as the people outside it,” says Steve Morgan of Redrow. He’s one of the few people in the housebuilding game with bragging rights over the Persimmon chief executive, Jeff Fairburn, when it comes to counting personal wealth. Morgan is worth more than £800m versus Fairburn’s windfall of roughly £110m.
The difference is that Morgan made his fortune over a long career by founding and owning a substantial chunk of Redrow. By contrast, Fairburn and his boardroom colleagues at Persimmon got lucky in that their long-term incentive shares were priced in 2012 at the bottom of a market that was pumped up the following year by the then chancellor, George Osborne, and his “help to buy” subsidies.
Morgan, via his Redrow shareholding, has also been a huge beneficiary of Osborne’s largesse, which he inexplicably failed to mention. But he would be right to argue that Fairburn is in a different boat. Morgan has gained by being an owner, with capital at risk, whereas the Persimmon crew are hired hands. As Morgan says, six years ago Fairburn would probably have jumped at a scheme in which the jackpot was capped at £10m.
To be consistent, Morgan should also have taken a pop at Berkeley Homes, whose incentive scheme is about 70% as egregious at Persimmon’s. But he’s also right to worry that the Persimmon affair is “doing the whole of the industry a complete disservice”. If the government’s review of landbanking results in “use or lose it” penalties, the housebuilders’ cries of innocence won’t get a hearing. Nor will tears be shed on their behalf.
Spoonful of medicine needed
Emma Walmsley, GlaxoSmithKline’s chief executive, has been in post for almost a year but she still hasn’t found a cure for shareholders’ worries about the dividend. The share price has drifted from £16.50 last April to a shade under £13, and angst over the long-term safety of the dividend has probably been the main driver.
There was nothing wrong with GSK’s actual figures for 2017. Ignoring currency effects, full-year operating profits improved 5% to £8.57bn, helped by the failure of generic rivals to win clearance to launch copycat versions of GSK’s big asthma drug, Advair. Arrival or non-arrival of generic competition for Advair in 2018 will again heavily influence GSK’s earnings (could be up 4%-7%, might be flat or down 3%, estimates the company) but there is sufficient confidence to commit to a divi of 80p.
Fine, but the cover still looks very thin against 2017 earnings of 112p. That is especially so when you remember what’s bubbling beneath the surface.
Investors’ original worry was that Walmsley could imperil GSK’s dividend-paying capabilities by paying big money for Pfizer’s Advil-to-ChapStick consumer health business. The group is in the running with Reckitt Benckiser for a deal that could be worth $15bn-plus but, actually, the divi dangers on that front may be overstated. The dividend is more important than big deals, Walmsley suggested, which presumably means the Pfizer purchase will only happen if the divi calculations aren’t thrown out of whack.
Instead, the new worry is an investment splurge in the core business of drug research and development. “Improving our pharmaceuticals business remains our main priority,” Walmsley has said consistently without ever putting a number on the sums involved. The big reveal will come in July, which now looms as a critical date in the Walmsley era.
As the share price suggests, the market remains to be convinced that GSK can radically improve the productivity of its labs. But the scepticism is odd in one way. For years, investors wanted more focus on pharma, now they’re worrying about the cost.
Oh dear, President Trump is tweeting about share prices again. “In the ‘old days’, when good news was reported, the stock market would go up. Today, when good news is reported, the stock market goes down. Big mistake, and we have so much good (great) news about the economy!” he declared.
Actually, the mistake is for presidents to comment on stock markets. Jay Carney, White House spokesman in the Obama administration, explained why in a much better tweet on the day of Wall Street’s big fall.
“Good time to recall that in the previous administration, we NEVER boasted about the stock market – even though the Dow more than doubled on Obama’s watch – because we knew two things: 1) the stock market is not the economy; and 2) if you claim the rise, you own the fall,” he said.
Spot on. If the US economy performs well but the stock market fades, which is quite possible if the US Federal Reserve feels obliged to raise interest rates, Trump will deserve no credit by his own logic. It was a silly game to start with.