MUCH has been written about strategic direction and succession issues at Standard Life. But the company with at least as much explaining to do in the coming weeks will be Royal Bank of Scotland.
The continuing slide in the group's share price – down 12 per cent in January and down 46 per cent from the pre-credit-crunch high last year – has raised concerns about the dividend and that the company may spring a rights issue call on shareholders
for more capital. The shares have now fallen to 388.75p, where the yield is a question-begging 8.3 per cent.
According to research by Citigroup, RBS needs to raise £12.5 billion to shore up its balance sheet and achieve a European average Tier 1 capital ratio. The dividend would appear a tempting economy. The cost of the interim and final dividend combined is running close to £3bn. But weekend press reports suggest RBS chairman Sir Tom McKillop recently met with institutional shareholders to reassure them that the board has no need to cut the dividend or announce a capital raising exercise.
However, concerns persist that the group may need to dispose of assets, perhaps including the minority stake in Bank of China. While this stake is showing a good profit, it was acquired for strategic, presence-enhancing purposes in the world's fastest growing economy, and a sale now would be interpreted as a retreat from that strategy – and indeed on the expansion by acquisition that has characterised the Goodwin years.
The signs are that Sir Fred will be able to provide some reassurance when 2007 results are unveiled. But if the credit crisis continues and RBS comes under pressure to make disposals, the group's past strategy and credibility would come into question.
The concerns here would seem to be at least as great if not greater than the much reported problems at Standard Life. The shares had a bad week, falling to 216p at one point on news of Trevor Matthews's abrupt departure and a worrying downturn in fourth-quarter business.
Gregarious and popular marketeer though Matthews was, life companies have entered a period when real authority and leadership skills will be required. While he lacked for nothing in ambition, it is by no means certain Matthews would have been the runaway choice when the board finally came to make its decision. And the benefits of a pre-determined succession a year to 18 months ahead of the event are arguable.
Sandy Crombie will remain chief executive for at least a year, and he has enjoyed good performance support from Keith Skeoch and his team at the fund management arm, Standard Life Investments. For now, the company is trading some 17 per cent below embedded value and at a price that suggests it will write no new business. As with RBS, investors should not be panicked out.
Give rate easing a chance
If RBS and Standard Life feel themselves poorly priced, it is a condition now worryingly common across much of the stock market. Will Marks & Spencer not sell another pair of underpants, or Barratt a new home?
Yet that, as Mike Lenhoff, chief strategist at Brewin Dolphin, points out, is what the price-earnings ratio of many companies are now telling us (see graph, left). The p/e of M&S is down to 9.2, that of RBS at 5.4, Taylor Wimpey at 4 and Barratt Developments at 3.8. This is pricing in more than weak profits but something akin to a collapse.
The problem is that share prices, particularly of companies mainly or wholly exposed to the domestic economy, are already discounting a slowdown and more credit contraction. The danger now is of a "feedback loop": that every piece of more bad news adds to debt provisioning, credit contraction and the forces of slowdown.
There is also much despair as to whether interest rate cuts will cushion the slowdown. But the rate-cutting cycle in Britain has barely started and even in the US they will need time to work. The fact is that monetary policy is being eased substantially and a bottoming out and upswing in the cycle will come through eventually.
I am grateful to veteran Wall Street watcher Ed Yardeni for the following. Since 1970, there have been 14 monetary easing cycles. The Standard & Poors 500 was up 3.2 per cent, 9.5 per cent , and 12.5 per cent on average, three, six and 12 months later. And what are analysts saying now about earnings growth for the S&P 500 and its ten sectors? They estimate S&P 500 earnings fell 21.7 per cent year on year in the fourth quarter, down from a forecast of +7.9 per cent at the beginning of October. According to the "flash" mean (estimates less than six-weeks old), analysts expect S&P 500 Q4-2007 earnings to fall 22.2 per cent year on year.
That's the bad news. The good news is that nearly all the decline is directly attributable to write-offs in the financials sector. S&P 500 ex- Financials earnings growth is expected to be up 13.3 per cent year on year, and is only down slightly from 13.8 per cent since the beginning of Q4.
As for 2008, we are witnessing a gigantic poker game, one in which the Fed is betting heavily through rate cutting that the hand of deep recession will prove a busted flush. Others fear that more bad news on the credit crisis could counter any confidence pick-up from lower rates.
With the government's $150 billion stimulus package not feeding through to households until the late summer, we will not know for sure until late in the year how quickly the combination of rate cuts and fiscal stimulus will kick in. But history suggests the latter will come to prevail in the end.
The full article contains 997 words and appears in The Scotsman newspaper.
