IR Weekly – Tuesday 1st September
Welcome to FTI Consulting’s IR Weekly newsletter.
In this week’s edition, we look at the Danish companies who are bravely, if reluctantly, reinstating guidance following a request from the financial regulator. We then turn to the findings of a report from Janus Henderson on global dividend payments before exploring the resurgence of IPOs in the tech sector. Next, we consider research that casts doubt on the argument that strong ESG credentials have protected companies in the economic downturn. We continue by discussing the K-shaped market recovery before finally turning to the looming problem of accrued annual leave.
This week’s news
It is not possible to suspend your guidance ‘forever’
Denmark’s regulator the Financial Supervisory Authority (FSA) has urged companies to reinstate full-year guidance in their second-quarter results despite continued uncertainty over how Covid-19 will impact industries, reported Financial Times. Many Danish companies have reluctantly followed orders, but given a bigger range of outcomes than before to reflect uncertainty or warned that guidance could change should there be a second lockdown. Maersk, the world’s largest container shipping line, reluctantly reinstated its guidance “only because the FSA wants us to” while Danish jeweller Pandora noted that none of their competitors were providing guidance. Anne Bruun, director of capital market regulation at the FSA in Copenhagen, argued that remaining silent on a company’s outlook could “harm the market” and that companies needed to work with political and economic uncertainties around the world.
Global dividends plummet
The Covid-19 crisis has prompted the world’s biggest firms to cut dividend pay-outs between 17% – 23% this year, amounting to as much as $400bn, reported Reuters. Fund manager Janus Henderson has calculated that global dividend payments dropped $108bn to $382bn in the second quarter of the year, a 22% year-on-year drop which is the worst since the financial crash. Globally 27% of firms cut their dividends. The picture in Europe is even more severe with over half of firms slashing dividends and two thirds cancelling them outright. There are, however, differences between sectors. The European Central Bank ordered banks and other financial services firms to stop paying dividends which accounted for half of the 45% reduction in Europe. It remains to be seen what will happen in the fourth quarter and whether pay-outs will be fixed at a lower level until the end of 2021.
A new dawn for IPOs in Silicon Valley
The Economist announced that IPOs are back – for tech startups at least. When the pandemic struck in March and kickstarted a period of economic uncertainty, the IPO market all but dried up. But isolation and remote working have allowed many tech firms to thrive. Zoom has seen its share price rise fourfold since floating in April 2019 while cybersecurity firm Crowdstrike has quadrupled in value since March. Many tech startups are therefore looking to trade publicly. However, they have grown weary of the traditional IPO, which is a long, expensive and cumbersome process, so they’re considering alternative routes. One is a “direct listing”, popular with Slack, Spotify and most recently data-management firm Palantir. This is realistically only an option for cash-rich companies as firms are not allowed to raise new money after a direct listing. Meanwhile, Ant Group’s planned listing on the Hong Kong or Shanghai stock exchange raises questions about whether large Chinese tech giants will no longer look to Western exchanges when they can access Western capital through Hong Kong. Greg Chamberlain of JPMorgan Chase points out that “Not all technology companies are the same. They all have different objectives.” So bankers are expecting a new era of flotations that are diverse, tailor-made and target specific investors.
Does ESG stand up to scrutiny?
When the stock markets tumbled earlier this year, the relatively strong performance of ESG funds seemed to support the argument for responsible investing. However, the FT’s Moral Money reported that there is a growing group of sceptics who question whether it is ESG credentials themselves that have resulted in companies performing better during the economic crisis. Professors at the University of Waterloo, Tilburg University and New York University have published research arguing that ESG funds outperformed because investors were wary of selling shares in companies that were promoting social good during a pandemic. They suggest ESG funds benefitted from investor fears of gaining a bad reputation more so than the performance of the companies themselves. There will be many proponents of ESG investing ready to pick holes in this analysis, but the debate is a sign that they must be prepared to defend their ESG performance claims in the face of dissenters.
K is not OK
Over the past few days, the K shaped market recovery has been widely covered by the media. Writing for Bloomberg, John Authers argues that it is reaching a peak. The recovery’s imbalance in favour of the five biggest companies is particularly unusual. Authers suggests that this trend is unlikely to lead to a positive outcome, instead the divide is likely to widen. For some industries, the pandemic has increased existing gaps. For instance, the performance between department stores and retailers was already pronounced. Covid-19 reinforced this trend. Elsewhere, the tightening of lending standards is increasing divisions and is having a much bigger impact on little companies (reliant on banks for financing) than on large companies (who have direct access to the capital markets).
And Finally … Give me a break
Workers are usually keen to take holiday but not in 2020. The FT Lex Column discusses the pandemic’s impact on employee leave. Many employees have abstained from taking leave while working flat out. Others have refused leave due to travel restrictions. This is no small matter. With accumulated leave increasing, Capita reported a £42.6m charge for accrued holidays. However, the company has expressed hopes to unwind its provision by £15m when staff take their leave in the second half of the financial year. But this potentially kicks the can down the road; employers may have some tricky conversations on their hands over the coming months: either manage with a skeleton staff while employees enjoy extended Christmas holidays or ask workers to forfeit accrued leave.
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