Summary:
Taylor Wimpey's and M&S' problems are a sign that credit crunch has spread beyond financial sector. Falling property prices and weak consumer demand are taking a toll on a range of companies, and investors have shown they will not automatically pay up to help companies that are struggling. Because UK companies have had it exceptionally good over the past 25 years, it is possible that corporate earnings could fall a long way and still be above their long-run average. Companies need to adapt in order to survive these shifts. The focus should be on preserving cash, but also on treating shareholders with care. Executives may need to rely on investor goodwilll and shareholder patience. (Published: 02/07/08)
Notes:
- last week, signs that credit crunch has spread beyond financial sector:
- Taylor Wimpey: UK's largest house builder
- lost almost half their value after it acknowledge it had failed to secure a $500m cash injection to repair its balance sheet
- Marks & Spencer
- saw its share price drop by more than one fifth in response to a profit warning
- news is part of a broader bleak picture:
- credit squeeze hit last summer, but only now is a range of companies acknowledging that falling property prices and weak consumer demand are taking a toll
- Taylor Wimpey's inability to raise about £500m from potential and existing shareholders contains a particularly worrying message for UK companies
- investors feel no duty to support every company seeking cash
- knowing that other calls on their money are likely, they will not automatically pay up to help companies that are struggling
- UK companies have had it exceptionally good over the past 25 years
- corporate profits have soared as a share of national income
- returns on capital are at record highs
- were above 15 per cent in the first quarter of this year,
- Corporate earnings could fall a long way and still be above their long-run average
- dramatic sectoral shift in profits is also under way
- thanks to shocks from commodity markets and the fall in sterling
- the profits of oil and mining companies will soar still further, as will those of businesses exporting to China, Russia and the Middle East
- But companies exposed to the property market or the financial sector – notably banks, retailers and housebuilders – will be hammered
- Companies need to adapt in order to survive these shifts.
- First, it should be a priority to conserve cash.
- may mean paring back investment.
- certainly means suspending any share buyback programmes that still exist
- Second, they should treat shareholders with care.
- Executives may need investor goodwill to ride out any number of events
- from cutting planned dividend payments to repelling unwanted interest
- At the very least, they may need to rely on shareholder patience when trading is tough.
- Now is not the for a controversial board appointment or an opaque remuneration scheme
