IR Monitor – 13th September 2021

This week’s news

City of London faces fresh threat from £600m dividend raid

Boris Johnson’s £600m tax raid on dividends risks damaging the City of London, by deterring investors and punishing entrepreneurs as Britain struggles out of the Covid crisis, economists and business leaders have warned. As the tax on dividend income is set to rise  from 7.5pc to 8.75pc next April, The Telegraph has explored the views of several lobby groups that have branded the dividend charge a tax on wealth creators. Chris Sanger, head of tax at EY, stated that the government is effectively increasing “the cost of capital to a whole series of businesses which are looking to grow the economy”. Lord Bilimora, president of the Confederation of British Industry, also shared concerns, explaining how the dividend tax would dampen investment which “plays a critical role in supporting businesses and enabling growth across the whole economy”. At the margin, the new tax may also encourage companies with spare cash to lean more heavily towards share buybacks rather than greater dividends.

Warnings Coming Fast And Furious As Q3 Profits Brace For Big Hit

Following recent warnings from banks such as Morgan Stanley and Bank of America about the increasingly troubled state of the US consumer, ZeroHedge has analysed the impending compression of record profit margins. The blog had already suggested that warnings regarding Q3 earnings would become apparent over the next 2 weeks; less than a day after this prediction, one of the largest US liquor companies, Brown-Forman, cut its outlook for fiscal 2022, predicting “volatile” results through the year thanks to supply-chain disruptions and adding that it expects “more significant” unfavourable impact from supply chain disruption to hit margins in FY22. The announcement came as US machinery stocks also weighed on the broader market last week, with traders fretting that the supply-chain disruptions and higher raw-material costs would present challenges to the broader industrial and machinery industry.  ZeroHedge expects many more companies to “unexpectedly” guide much lower for Q3 and Q4, if not pull guidance completely.

The SEC Is Serious About Cybersecurity. Is Your Company?

This summer, the U.S. Securities and Exchange Commission signalled a significant change in how it thinks about what constitutes a threat to companies. Harvard Business Review has taken a look at how the SEC now considers cyber vulnerabilities to be an existential business risk. Recently, the SEC has levied fines against both Pearson PLC and First American Financial Corp due to a 2018 breach which resulted in the theft of millions of student records. According to HBR, these fines signal a major shift, and one that could profoundly change the way companies think about cybersecurity threats, communicate internally about these threats, and disclose breaches. Going forward, we will see greater scrutiny on how companies handle the disclosure of cyber threats, which arguably pose as significant a danger to businesses and their shareholders as supply-chain vulnerabilities or natural disasters.

Equity Research Has Changed — ‘And That’s a Good Thing’

Sell-side analysts have had a turbulent few years with MiFid II and Covid-19. Institutional Investor (II) has suggested that the ability to adapt in the face of the unknown is what defines the firms at the top of its All-Europe Research Team and its U.K. Small & Mid-cap Research Team. Exane BNP Paribas has been titled as the top provider again by II in 2020. Exane noted that interactions between analysts and clients in the last 18 months have all taken place remotely, digitalisation of research teams was forced due to the lockdowns and the teams faced added extra operational challenges. The firm noted that there is a growing appetite now from both sides for in-person meetings again once safe to do so.

Red warning lights are flashing over the rise of green investing

In a commentary piece for The Times Ian King has warned that there is growing concern regarding the rise of green investing. He suggests that the essay published by Tariq Fancy, BlackRock’s former CIO for sustainable investing, is devasting because his former position means his words carry extra weight. He argues that the investment outperformance claimed by ESG investors is exaggerated, profit and purpose have less in common than ESG investors think and that time horizons deployed by ESG investors are too short to tackle environmental crises. His points were reinforced with the investigation of DWS by the US SEC for “greenwashing” through overstating its sustainable investing activities. A key focus of the allegations was the data and methodology used to define what is an ESG investment. Fancy has stated that a lot of the data deciding what is classed as ESG is unreliable and produced by or overseen by people who do not work in the investing space. King suggests that, with ESG being one of the few growth areas for asset managers, there are plenty of incentives for active managers themselves to overstate their efforts in the field.

And finally…Today’s Theranos would have gone public via a SPAC 

Trevor Milton, founder of electric-truck firm Nikola, is facing similar charges of fraud as Elizabeth Holmes founder of the defunct blood-testing startup Theranos. Milton is said to have misled investors after claiming that the business debut truck was a fully-functioning prototype, when in reality it was still missing significant parts. Prosecutors claim that Nikola’s financial prospects were misrepresented and spurred investor interest after the business went public. But there is a difference between Nikola and Theranos, as Reuters Breakingviews has reminded us: at least the damage at Theranos was confined to professional investors. Today’s Theranos would have gone public via a SPAC and the losses would have hit mom-and-pop investors, not just experts.

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