Tag Archives: NW Brown Group

Stocks in Focus: Vodafone

This week I am looking at telecommunications giant Vodafone, which recently published its half-year results. For the past couple of years the company has been facing tough competition in Europe and losing market share in Germany, Italy, Spain and the UK. Furthermore, Vodafone had to write-down £4.3 billion earlier this year in India, its most promising growth market, when competition intensified with the introduction of a new mobile carrier that offered six months free service to customers.

However, these concerns seem to be easing as Vodafone surprised investors last week by raising its annual profit forecast. The revised outlook is the result of a stronger than expected start to the year with notable improvements in operating profit, service revenue and cash flow. European operations have performed well with strong performances in Spain and Italy. The group also announced that the merger of its Indian operations with former local rival, Idea Cellular, is progressing well, which gives hope that the combined business can recover in the near future. Management has raised its guidance for full-year profit growth to around 10% from 4%-8% and the interim dividend was increased, which reflects a growing confidence in the future positive performance of the group.

Several undertakings led to these encouraging results, namely improvements in the quality of products and services, investment in networks, cost cutting measures and the merger of underperforming operations. Nonetheless, the cost of delivering these enhancements, including spending on infrastructure and mobile spectrum, is enormous. Investors should not neglect the importance of sustainable revenue and strong cash flow generation when evaluating companies.



Stocks in Focus: Fidelity Special Values

This week I am looking at Fidelity Special Values (FSV), an investment trust that has recently released results for the year to 31 August 2017 and is celebrating five years under the management of Alex Wright.

Mr Wright adopts a contrarian and value style to picking stocks. This means that he focusses on finding out of favour companies that he feels are being priced substantially below their true value. This undervaluation usually stems from the market over-reacting to negative news concerning a stock or sector.

The trust sits within the UK All Companies sector and is able to operate in a completely unconstrained manner versus its FTSE All-Share benchmark. This has allowed Mr Wright to have a higher level of exposure to medium and small sized companies relative to his peers. This area is where Mr Wright and his colleagues are currently finding the most value. They are also looking at companies that earn the majority of their earnings in Sterling, as the team feel those with substantial overseas earnings are currently looking more expensive.

With the current uncertainty surrounding markets, the ability to pick stocks successfully on a bottom-up basis becomes evermore important. Mr Wright’s contrarian and value-based approach can sometimes result in a share price that underperforms the wider market in the short-term. However, his track record since taking over the management of FSV in late 2012 is impressive and suggests that his approach is adding value over the long term.


Points of View: Interest Rates

On Thursday the Monetary Policy Committee (MPC) voted 7 to 2 in favour of raising interest rates.  This came as no surprise to investors who had priced in a greater than 90% chance of a rate rise.

The market reacted counter-intuitively to the announcement.  The yield on 10 year gilts fell 0.08% and sterling fell 1.4% against the dollar.  Previously the Bank of England (BoE) had given guidance that rates might need to rise faster than markets anticipate.  Instead, the latest announcement said subsequent rate rises would be gradual – a more conservation tone.  The BoE also revised inflation figures downwards and made reference to a negative impact from Brexit on the economic outlook.

One of the main concerns in raising interest rates is the impact it will have on household mortgage payments.  The BoE estimates that the servicing cost of the average mortgage will increase by £15 per month once fully passed on by lenders.  However, the overall impact of this will take time to filter through.  Fewer households own a mortgage than previously and there has also been an increase in the number of households on fixed rate mortgages.

The BoE faces the same problem as the US Federal Reserve, aiming to increase rates so as to prevent a sustained rise in inflation but not so quickly as to damage the economy.  While the BoE have been clear that this rate rise is not a one-off but part of a sustained policy, the market’s reaction has been one suggesting further rate rises are further away than previously estimated.  It is important for the BoE to get interest rates back to more normal levels to allow them more options for the next economic downturn. However, any further increases would put pressure on households and companies struggling to service their debt.


Stocks in Focus: Connect Group

This week I am revisiting Connect Group, the UK-based distribution and logistics company, following the announcement of its preliminary 2017 full year results last week.

The last few years have been challenging for the company, which has been managing decline in its traditional newspaper and magazine distribution business whilst focussing on its broader distribution offering.  Having sold off its Education and Care division earlier this year, the group now operates across three key divisions: News & Media (at the heart of which sits Smiths News, the UK’s leading newspaper and magazine distributor), Books and Parcel Freight (predominantly under the Tuffnells brand).

Following a strategic review earlier this year, the group now has centralised leadership teams across all of its divisions with the primary aim of becoming more efficient. Reducing costs is particularly vital in the News & Media division as the downward trend in newspaper and magazine sales looks set to continue – it is therefore encouraging to see that profits for Smiths News rose by £2.7m this year.

Unfortunately, the growing areas of the business did not perform quite so well, with Tuffnells seeing operating profits fall by 20% despite an increase in volumes. The division faced higher variable costs due to erratic volumes on top of one-off costs to upgrade depot facilities. Pass My Parcel, the ‘click-and-collect’ business, is delivering strong volume growth thanks in part to the introduction of a returns service for Amazon late this year. However, the business is still loss-making at this early stage of its growth and is not expected to break even till the end of 2019.

Investors have reacted positively to the update, driving a significant recovery in the share price following a period of weakness. Looking forward, the shares still look cheap on many metrics – although management must ultimately convince the market that the growth areas of the business can offset decline in the traditional newspaper and magazine distribution market.


Stocks in Focus: British American Tobacco

This week I’m looking at British American Tobacco (BAT), which is a leading company in the global tobacco industry. I last wrote about BAT a year ago following its offer to acquire the 57.8% of Reynolds (a US-focussed peer) that it did not already own. The deal was approved by shareholders earlier this year, taking BAT back into the $130bn US market after a 12-year absence.

Shortly after the takeover, the US Food and Drug Administration announced that it aims to reduce nicotine in cigarettes to non addictive levels, causing investors to become more cautious of the tobacco sector. However, the management of BAT reassured investors that the news was not unexpected to the company, and that they continue to focus more on the ‘Next Generation Products’ (NGP) part of the business. The NGP products, which BAT have invested more than $1bn into developing, include Vapour Products like e-cigarettes and Tobacco Heating Products, offering consumers alternatives thought to be healthier than traditional cigarettes. Management have since announced that they will be integrating NGP into their existing business infrastructure, hoping to strengthen an area that is fast becoming a key part of their mainstream business.

Although it is likely that traditional tobacco sales volumes will continue on a downward trend, BAT seem well placed to offer alternatives to consumers, with demand for e-cigarettes continuing to grow. In the meantime, cost cutting and consolidation have enabled earnings and dividends to continue to rise in recent years. Looking forward, investors need to consider whether this can continue – to what extent are NGP products an opportunity and to what extent are falling sales in traditional cigarettes and ongoing regulatory pressures a threat?


Thatcher’s gift

Often written about and commented upon by the media is the subject of Inheritance Tax and increasingly there is a feeling that the true implications of this tax are misunderstood.

We have a tax which is levied at 40% on everything you leave behind in excess of the standard nil rate band currently £325,000. Yet there is no need to pay the tax if you plan properly.

It would be fair to say Inheritance Tax could be viewed as an aspirational tax as it seems that there are many who presently care little about this tax, as they don’t believe the tax applies to them. Whether or not they aspire to build an estate with real value or not it seems more and more of us are rapidly falling within the grasp of this iniquitous tax. The time for action is now and not to wait until it is too late to undertake any meaningful planning.

So whilst some of us sob into our gin and tonics about the real possibility of having to pay Inheritance Tax on our modest estates, it would be fair to say HMRC are rubbing their hands with glee. They have recently reported record receipts for Inheritance Tax. In 2014/2015 the tax take for this tax was £3.8 billion and in 2015/2016 this had increased significantly to £4.8 billion this is an increase of an eye watering 22%.  Pretty cool numbers for what is seen as a tax only the rich need to be concerned about.

The question is whether this is really a tax that affects only the wealthy or does its grasp reach further? The Office for Budget Responsibility forecast that over 450,000 families will in 2016/17 have to face the prospect of paying tax on their inheritances. (Interestingly records from the Office of National Statistics show that 525,000 people died in England and Wales in 2016). These numbers suggest we all have to address the possibility we may be subject to Inheritance Tax.

Planning your financial affairs can be easy or complicated the choice is yours. We have over the years witnessed some very sophisticated tax planning arrangements designed to reduce Inheritance Tax.

One of the latest cases was M L Salinger and J L Kirby v HMRC (2016). They appealed against HMRC’s determination that Inheritance Tax was due on the estate. The appeal was upheld. The arrangement involved the transfer of a reversionary interest into an offshore trust. The taxpayer’s standpoint was that the reversionary interest had no transfer value as no consideration was given. The First Tier Tribunal had to decide upon two questions and as noted their considered decisions on these two questions favoured the taxpayer over HMRC.

This is all very interesting and hopefully good news for the beneficiaries. But they had to fight against the initial verdict and then launch an appeal all of which will have delayed distributions from the estate. Defending cases such as this one is not without cost or uneasiness for the eventual beneficiaries, and HMRC rarely lose cases.

The good news is this tax, which in truth penalises the sensible savers can be reduced or even negated without the need to create complex tax shelters such  as the one described. It is probably good advice not to invite scrutiny by HMRC

The simplest way to avoid Inheritance Tax is to make sure your estate is worth less than the nil rate band which is £325,000 or £650,000 if there is an unused spouse or civil partner allowance you can use. If you are an unmarried couple you still have your separate nil rate bands but this cannot be combined upon death.

Other opportunities are:

  • The new residential nil rate band which has the potential to remove £1 million nil rate band by the year 2021 However, even with this new Inheritance Tax break the actual numbers who will eventually benefit from this tax break are limited.
  1. The new allowance is reduced by £1 for every £2 by which the estate is in excess of £2million.
  2. The clue is in the name, you have to have owned a property that was at one time your home. If you don’t own a property you cannot benefit
  3. It only applies to property left to direct descendants. So to a couple who are not married and not being direct lineal descendants they therefore do not qualify for the residential tax break.
  4. If the property is worth less than £175,000 (or £350,000 for a couple) the nil rate residential allowance has a limited advantage.
  •  You can make a gift of any size now and as long as you survive a period in excess of seven years the gift is deemed to no longer be within your estate. But should you die within the seven years the gift falls back into your estate. Nevertheless gifts between spouses, civil partners and charities are always treated as being tax free.
  • You have an annual allowance of £3,000 each tax year which you can gift. There is also a marriage allowance of up to £5,000
  • You can make gifts out of income as long as these gifts are regular in nature and do not impoverish the person making the payments.
  • You can place a life insurance policy to cover  your potential Inheritance Tax liability into trust and use this to pay the liability
  • Equity release can be used to avoid Inheritance Tax.  However this is an option you should treat with great care.
  • Business Property relief and Agricultural property relief is available and also has the potential to reduce an estates exposure to Inheritance Tax
  • Having a properly written Will is a must although is does not in itself reduce the liability to Inheritance Tax. There is the possibility with careful planning and good legal advice to pass the Inheritance Tax allowances down the generations.
  • When you take out a Lasting Power of Attorney for Property and Financial Affairs you should ensure your Attorney(s) has the powers needed to continue any gifting you normally would have made.

The earlier one plans the more effective it can be and yes this is a tax which is more and more likely to affect all of us.

For more information about our services, simply complete our enquiry form, send us an email or call our Cambridge office on 01223 720208 or our Norwich office on 01603 692732.

The following subsidiary of the NW Brown Group is authorised and regulated by the Financial Conduct Authority to provide regulated services: NW Brown & Company Limited (191123).

Stocks in Focus: Centrica

At its recent conference, the Conservative Party revived its plans to protect families on standard variable tariffs. SVTs are the expensive plans that customers are automatically moved to when their cheaper fixed deals end. The government aims to cut gas and electricity costs by £100 a year for 17 million families and the draft energy bill published last week gives energy regulator Ofgem the power to cap SVTs. However, no action will be taken until the new legislation has been passed by Parliament and a decision has been taken on how the actual price cap is calculated – it is unclear how long this will take.

For Centrica, the parent company of British Gas and the biggest energy supplier in the UK, a price cap will certainly make market conditions challenging. The majority of British Gas clients are on SVTs and a cap will result in a fall in revenue, which in turn may put pressure on the company’s dividends. Unsurprisingly, it argues that capped prices will reduce competition in the industry, reduce choice for customers and potentially impact customer service – as supported by the Competition and Markets authority.

Nevertheless, Centrica has demonstrated its fortitude in being able to navigate this regulatory clampdown through a diversified product offering, its cost efficiency strategy and a focus on quality rather than quantity of its customer base. The share price has been weak since the cap was first announced and long-term shareholders need to consider whether this is an opportunity or a threat. Beyond this, the Labour Party’s plans to nationalise several industries, including the utilities sector, give market participants more to think about. For his part, Centrica’s CEO has signalled confidence in the business by buying shares in the company last week.