IR Monitor – 25th January 2021

This week’s news

Q4 earnings begin in earnest: why they don’t matter

ZeroHedge gave a characteristically cynical assessment of the Q4 earnings season as one in which nothing that is reported will actually matter but more mainstream voices have echoed this sentiment. Goldman Sachs have suggested that “investors will look through 4Q results and focus on company commentary about the trajectory of recovery in 2021.” Goldman remind us that consensus 2021 EPS estimates for the overall S&P 500 index have risen by less than 1% since November 9 (when Pfizer/BioNTech announced the efficacy of their vaccine). Consensus forecasts have historically been too pessimistic coming out of recessions (e.g. in 2010) and Goldman warn that analysts tend to underestimate margin rebounds in recovery periods. The bank sees three sources of potential margin upside: (1) operating leverage, which currently stands at the highest in a decade, (2) moderating costs such as labour and T&E, and (3) the growing weight of high margin industries in the S&P 500.

Company bosses warned not to freeze investors out of AGMs

The boards of FTSE 350 companies have faced growing pressure to introduce virtual meetings for AGMs in 2021, in a bid to encourage increased shareholder engagement. The Telegraph reported that this is in the context of 81 per cent of FTSE 350 companies holding closed meetings last year. It has widely been accepted that, with the continuation of the pandemic, videoconferencing will have to be implemented. However, there has been much debate over the shift to video conferencing and its potential as a permanent fixture for boards; although it will mean increased accessibility, it could also increase the control companies have over Q&A segments. One investor was quoted as saying that it would give companies the opportunity to edit questions and answers which could mislead retail shareholders. Moreover, conversations may be confined to a superficial level rather than going into the details and facts that are necessary.

UK dividends set to remain depressed in 2021, says report

The Financial Times reported that UK dividends will recover by just 8 percent after they fell to their lowest level since 2011 in 2020. Energy and Oil sectors are expected to be the slowest to recover, as they took the opportunity to permanently reset their dividends to more sustainable levels last year. However, the Financial services sector was hit the hardest, accounting for 40% of the total cuts after they received political pressure discouraging pay-outs. The article concluded that as investors revaluate their options, the UK holds especially high risks for income investors, as investment broker AJ Bell predicted that a mere 10 firms are expected to pay 75% of the FTSE 100’s 2021 Dividend. This was summarised by AJ Bell’s Director Russ Mould: “concentration risk is something that all income-hunters must address when they assess the UK equity market”.

Maybe the index funds don’t vote  

In 2019, Bloomberg’s Matt Levine devised (on his own admission) a half-baked theory that index funds don’t vote their shares, but instead keep economic ownership of companies while selling their votes to those who care more about that individual companies’ performance. Levine argues that index funds are more concerned about getting every penny of stock lending revenue, passing these returns on to their investors in the form of better performance or lower management fees. Evidence has now emerged supporting this theory suggesting that, before 2019, index funds left more shares on loan during big votes and voted fewer shares. Is the problem of big indexers not voting a bad one? Occasionally the result is that companies make decisions that the index funds oppose. But when it comes time to vote the companies are mostly controlled by more concentrated investors, who have the time and incentive to pay attention and to vote for what’s best for them.

The IRR of IR

Even IR was not immune to 2020’s disruption according to the London Stock Exchange. Investor engagement went virtual; more of it was done direct; and the scope of the IR role expanded further. Yet despite the expansive reach and strategic nature of the role, the norm is still for IR teams to report to finance, where it’s often perceived as a cost centre. IR budgets are small, which seems incongruous as the ROI from a well-resourced IR team is probably amongst the highest across any business. Not only does good IR have a positive impact on company valuation but, more dramatically, the consequences when IR goes wrong are plain to see. The implications for quoted companies are profound. Companies can shape the outcomes for themselves, win in the competition for capital and build long term strategic relationships with investors. This makes high quality IR more important than ever, but this requires investment in people and in the tools they require for the job.

And finally … the dark side of investor conferences 

Investor conferences are an important component of a firm’s IR efforts. Conferences provide managers with the opportunity for face-to-face interactions with investors and analysts. Managers can use these interactions to increase firm visibility and to shape external perceptions of the firm’s operations and strategy. However, a new paper by Columbia Law School finds a darker side to IR activities, clouded by one particular form of managerial opportunism: “hyping” the stock to sell shares at inflated prices. The results of the paper are consistent with some managers releasing voluntary disclosure prior to the conference (that temporarily inflates share price), selling their shares to take advantage of temporarily inflated prices, and prices subsequently reversing over the next six months. Perhaps investors shouldn’t always believe the hype.

Conferences

28 January: Mining Conference, TD Securities (Virtual)

29 January: Gene Therapy Summit: The Changing Regulatory Landscape, Cowen (Virtual)

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