The difficulties of investing in companies on bid hopes have been amply demonstrated at AstraZeneca (AZN), where many shareholders are probably wishing they had managed to sell out at the top. Congratulations if you did.
I never buy shares on bid hopes for various reasons but mainly because you can hold them for months or years and nothing happens. Also bid talk has probably already pushed the shares higher so you are buying at an inflated price.
At the other end of the scale is deciding what to do when a bid arrives. It is generally best to hold on to see what develops, which is what I recommended in the case of Astra, but you can leave it too late.
Over the weekend, as word leaked out that Pfizer (PFE) had come back with a final offer, I resolved to tweet on Monday that Astra shareholders should take profits in the market. That applied especially to those who did not want to end up holding Pfizer shares.
Too late! The Astra board dug in its heels and the shares dived. They are still well above their level in mid-April and you can still take a decent, albeit lesser, profit but my inclination is to hang on, although the shares are still sliding. Astra is a decent company making profits and paying dividends. And Pfizer may still come back with a deal that is worth £10 a share more than the current level.
Oil Spills and Retail Woes
Two old favourites cropped up again this week: BP (BP.) and Marks & Spencer (MKS). The bad news rolls on.
BP remains bogged down in the US legal system, where lower courts are disinclined to put the interests of a British company ahead of American citizens, however undeserving. So BP’s attempts to stop paying compensation to Gulf state residents who suffered no losses but are cashing in on the oil spill have hit another brick wall.
A further expensive appeal will be necessary. At the other end of the political spectrum, BP remains heavily dependent on Russia, which is increasingly distancing itself from rapprochement with the West, as evidenced by the signing of a gas supply deal with China.
The yield is 4.6% and the PE a derisory 6.9 times so a lot of bad news is priced into the shares. If you are tempted, just be aware of the risks.
The turnaround at Marks & Spencer is taking longer than expected according to chief executive Marc Bolland. For profits to be still falling after three years of a three-year turnaround, it doesn’t look too good.
Heavy investment has drained resources without delivering higher sales, which are more dependent on the goods on offer. Once again the womenswear range has been overhauled with little effect. Once again Bolland sees ‘early signs of improvement’. He sees more than I do. What I see is heavy press advertising from arch rival Next.
The yield is a decent 3.8% but the PE of 13.9 is in line with the stock market average and I feel that M&S should be on a lower rating.
Royal Mail Competition Complaint
It hasn’t taken privatised Royal Mail (RMG) long to start moaning about having to deliver letters to Land’s End and the Shetlands while rivals cherry pick the lucrative routes in and between city centres. This was always the great flaw of putting postal deliveries into private hands and why previous governments that looked at the idea sensibly backed off.
One former minister who dropped the hot potato 20 years ago was Michael Heseltine. I put the point to him at the time: either mail collections and deliveries will have to be priced according to distance or the government will have to subsidise far flung services. He agreed.
A decent length of time will have to elapse before the unpalatable decision is taken. There are plenty of precedents for governments, Conservative, Labour and coalition, using privatisations and PFI contracts to pump money into private companies, allow them to rip-off customers, or both. The railways are a prime example.
I confidently predict that in the next parliament a ‘solution’ will be found that boosts Royal Mail’s income and allows it to compete on what is bound to be an unlevel playing field.
