IR Monitor – 1st June 2021

This week’s news

Good company, bad investment: The thinking behind investor decisions

Executives of listed companies are often so convinced of the value of their management and strategy that they find it difficult to understand why an investor would not want to buy their stock, or (worse still) might even decide to sell it. These executives often forget that investors do not make decisions based on whether they like a company or its management, but on whether they believe that buying the shares will generate returns. To help executives towards a better relationship with the stock market, IR Magazine has highlighted the key factors influencing investor decision making. The investor’s time horizon constitutes a key component: investors normally evaluate companies based on a 12-month view, but short-termism has accelerated greatly in recent months. Investors are also trimming their portfolios, and given that their clients are likely to withdraw funds, want to be confident that they can get out of positions quickly. Fund managers must also consider how they are assessed, facing pressure from both clients and superiors if they perform poorly against the benchmark. With this in mind, companies must work to create shareholder confidence, communicating consistently and building strong relationships. Finally, it is worth remembering that if investors sell and are happy with their gains, it is highly likely that they will return.

Investor opposition to U.S. CEO pay at its highest ever

According to recent analysis by ISS, so far this year, investors have rejected a record number of executive remuneration plans in non-binding votes of US-listed companies, rejecting both pay rises and the easing of performance targets. In particular, the consultancy found that 14 S&P 500 companies have had over 50% of investors reject executive compensation packages, and it believes that there will be more to follow in the coming weeks. For a point of comparison, in 2020 investors rejected a total of 12 CEO pay plans over the course of the whole year. The analysis was reported last week in Reuters, who suggest that those companies involved have defended high executive pay plans with the argument that they incentivise top managers in a downturn – but investors are increasingly sceptical. Instead, investors believe that shifting the performance goalposts for managers is unjustified and may even demoralise employees who don’t enjoy the same protections as upper management.

Resurgence of global dividends expected after strong Q1 performance

Investment Week has reported on Janus Henderson’s latest Global Dividend Index. This suggests that global dividends are beginning to show signs of a resurgence, with pay-outs in the first quarter of 2021 only 1.7% lower on an underlying basis than the same period for 2020. Dividend pay-outs in Q1 reached £278.5bn, with just one in five (18%) companies cutting their dividends, well below the one third (34%) that did so over the last year. The encouraging figures have led to the asset manager upgrading its dividend forecast to $1.4tn for the year, representing an 8.4% headline increase from 2020. As we move into the second quarter, Janus Henderson expects “very positive” year-on-year comparisons (as this was the worst period for dividend cuts last year).

What can taxi rides tell us about earnings forecasts?

Writing for Bloomberg, Matt Levine has looked at the findings of a novel study that assessed what face-to-face meetings between corporate managers and sell-side analysts, as captured via New York City taxi trip data, can tell us about those analysts and the accuracy of their earnings forecasts. Investors and analysts often talk to the managers of companies and often their investment decisions and analysis for these companies is the better for it. At one level, this isn’t so surprising – a detailed in-person discussion is sure to glean insights that are not available publicly. And yet, at a technical and legal level, companies should not be sharing material non-public information with analysts or investors without also disclosing it publicly. The authors of the study, from the University of Toronto, found – perhaps not surprisingly – that ride volumes between brokerages and companies increase around earnings announcement dates and, moreover, that these meetings are correlated with better earnings forecasts. In the words of the study’s authors, these conversations help analysts “fill in their ‘mosaic view’ of the companies”.

Dealmakers hit the road

M&A has never been stronger, and neither has investment bankers’ fear of missing out on meeting clients. According to Reuters, the easing of Covid-19 restrictions has led to a flurry of in-person meetings between bankers and top executives, despite deal making flourishing over Zoom during the past year. Some investment bankers are reportedly worried that they could lose existing clients if competitors are able to meet them in person, while others fear that they will be unable to win new clients. There is also concern about fatigue from long hours spent on Zoom, and the impact that the lack of interaction with senior colleagues could have on junior bankers, who have found it difficult to evolve into rainmakers with social distancing restrictions in place. Despite this initial boom in in-person meetings, it is not yet clear whether bankers’ travel will return to pre-pandemic levels. Many expect a hybrid model to emerge – with many less keen to spend time with clients on more procedural tasks that could be carried out remotely.

And finally … In defence of the long lunch

If you have, in modern parlance, a key “stakeholder” or even a real shareholder i.e. someone whom you treat regularly, clear a space in your schedule and arrange lunch. This was the conclusion of a recent op-ed in City AM. The author acknowledges that long lunches have long fallen out of favour. The grim phrase lunch “al desko” was first recorded in the Washington Post 40 years ago, so the rot has a long history. Lunch has been squeezed out by a toxic mix of working cultures imported from the US, financial constraints following the crash of 2007-08, and the practical complications of Covid-19 homeworking. Yet, long lunches they still have a utility in modern business – if only for certain industries. Surgeons, for instance, do not suit a boozy lunch. Neither do machine-operators. But, for the most part, the author believes that a bit of responsible indulgence is beneficial in that it helps to recharge creative batteries at work and foster warmer social connections between clients and colleagues.

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