Weekly Wrap: Spain, Tesco vs. Sainsbury, WPP

Transcript
Alanna Petroff: Welcome to the Weekly Wrap where we discuss some of the main market moving events of the week. We are going to start off today by talking about the Spanish bailout, then we are going to move on to looking at trading statements from Sainsbury and Tesco, and from there we are going to look at a shareholder revolt over a WPP.

So Holly, let's start with Spain.

Holly Cook: So we heard over the weekend that the Spanish banks are going to get a bailout to the tune of EUR 100 billion. The details are still being thrashed out, but I spoke to Morningstar's Fernando Luque. He is a senior financial analyst based in our Madrid office, and I asked him what the initial reaction on the ground in Spain has been. This is what he had to say.

Fernando Luque: Well I have to admit that I have been surprised by the urgency of the decision, but I think that there are good news and bad news attached to this bailout. The good news is that, finally, the Spanish government is recognising the problem of the banking sector, or at least part of the banking sector, because it's important to say that not all the Spanish banks have problems. Only 30%, according to the IMF, need more capital.

Another good news, at least from my point of view, is that we are closer to the big solution to the eurozone debt and that means that the European Central Bank will definitely at the end act more aggressively on the bond market, buying directly Spanish bonds.

The bad news is that at the end this bailout will mean, in my opinion, more debt for Spain and more pressure on the Spanish bonds… Many people have the impression that we should have done this bailout three years ago. We have lost a lot of time, and we still don't know if EUR 100 billion will be sufficient to save the financial sector.

Cook: I think it's also clear from the reactions that we actually saw on the bond market this week that people are far from convinced that this is an effective solution.

Petroff: Now let's move on to UK corporate news. We saw some trading statements this week from Sainsbury and Tesco. Now Tesco numbers show that they had a slight decline in like-for-like sales, while Sainsbury numbers show that they had a slight rise in like-for-like sales, which Michael Keara, the Morningstar analyst here, he says that seems like it's good news for Sainsbury—it seems like they are gaining market share against Tesco.

However, if you look at the numbers, they are not completely comparable, because with Tesco we saw that they did not include the Queen Diamond Jubilee weekend while Sainsbury did. So, you can't really compare them, because of course, people were buying more over that weekend.

Now I spoke with Rodney Hobson, he's our Morningstar columnist, and this is what he had to say about the numbers.

Rodney Hobson: They confirmed what we've seen over the past year and before that in terms of Sainsbury's. Sainsbury's is on the up. I own shares in them. I've topped up my holdings. I think this is a very good solid company paying a terrific dividend. It's not reflected in the share price, which surprises me.

Tesco on the other hand has been sliding for the past year. I think it's losing its way. I'm concerned about the fall in like-for-like sales. People may think that Tesco can't turn sour; yes it can. Sainsbury's was the number one supermarket in this country. It went on a very long slide before Justin King came in and turned it round. The same can happen to Tesco and I fear it will do.

Petroff: Now Rodney clearly has some very strong opinions about Sainsbury versus Tesco, and if you want to get into this space, the UK retailer space and you are not quite sure where to go, you are not convinced by Rodney's argument, you always could just buy both, that would hedge your bets and give you much fuller exposure to the sector as a whole.

Okay, now let's move on from retailers to the advertising space.

Cook: Okay. So WPP, which is an advertising giant, held an AGM this week. Shareholders voting there were pretty unhappy about some news about the CEO's pay package. So, in 2010, Sir Martin Sorrell received close to £4 million; in 2011, that's risen to £6.77 million. So at the AGM this week, we saw close to 60% of shareholders voting against that 60% pay rise. I think what’s interesting to note is that the shares in WPP did really well over the first three months of the year, but they’ve completely undone those gains in the second quarter, and I think against that background what we are seeing is the shareholders saying, ‘my holding hasn’t earned me anything, how come you get a 60% pay rise?’

This is actually a trend that we are seeing, shareholder revolts over pay. We’ve already had CEO resignations from Aviva, AstraZeneca and Trinity Mirror so far this year. I’m not saying that’s going to happen to Sir Martin Sorrell…he’s the founder, he started the company 30 years ago. But what I do think is interesting to note is that shareholders are really making their voices heard, and as a shareholder in a company, I think it's worth if you’ve got an opinion and you want to counted, you do need to make your vote heard at the AGM.

So, if you are an investor like me, you’ve had shares for long time but you’ve never actually ticked that box and posted off the voting form for the AGM, it’s worth doing if you’ve got an opinion that’s worth saying.

Petroff: Okay. Thanks very much, Holly. That’s our Weekly Wrap. Thank you very much for joining us.