The gap between corporate pay and performance is growing, despite the correspondingly growing level of protests from shareholders. Royal Mail (RMG) is the latest example but it is unfortunately only one in a long list. The more money you pay a director, the less incentive there is for the individual to work harder as they know they will get a generous payoff when they are caught out.
Royal Mail has been under fire for overpaying directors and we can see that the criticism was justified. Annual profits are now forecast at £550 million, and although the board couldn’t bring itself to say so in the statement, that is at least £100 million down on expectations and £150 million down on last year.
As the warning was put out in the middle of Monday afternoon – someone on Twitter joked it was sent second class – one assumes that the directors were not on top of the business. Efficiency improvements are running at only 0.1% rather than the 2-3% target, which is quite some shortfall. Also, the decline in letters has been worse than expected, perhaps because the post is now delivered so late in the day thanks to those “productivity” savings.
The discrepancy between hope and reality is sufficiently large for shareholders to feel that it should not have come as a surprise to the board.
Perhaps attention was diverted to agreeing a payoff of nearly £1 million to the departing chief executive and a £6 million golden hello for the next one, payments that prompted shareholders to vote against the remuneration report, thus dislodging the chairman.
Royal Mail could try to fill the hole by raising postage charges but that would simply drive down the number of letters even faster. One can only hope the new chief can earn his £6 million and much more.
The shares slumped 18% on the day of the announcement and another 8% the following morning. The shares are in serious danger of falling below the 330p flotation price. Five years ago that was seen as a gross undervaluation. It now looks too much to pay, especially as this is one of the most heavily shorted stocks on the London exchange.
Is this Retailer Undervalued?
Over the years Ted Baker (TED) has been one of the better stories in retailing, so a 3.2% dip in profits despite a 3.5% increase in revenue in the 28 weeks to 11 August was a bit of a blow. So was the warning that the rest of the year will be challenging.
Baker took a £557,000 hit from the closure of House of Fraser, which accounted for most of the profits shortfall. However, I felt that the company is well run and will continue to grow globally, and that shareholders should be reassured by a 7.8% increase in the interim dividend.
The shares have lost a third of their value since March. That looks a bit overdone to me.
Do You Have the Nerve to Hold?
Shareholders in property group Intu (INTU) faced a tough choice, though a pleasanter one than they have got used to. The euphoria of reading in the morning newspapers that John Whittaker, owner of Intu’s largest shareholder Peel Group, was trying to put together a consortium to launch a bid dissipated somewhat when Intu put out a statement denying that it has received any approach yet.
Intu shares slipped from 250p at the start of the year to 150p after a proposed merger with rival Hammerson (HMSO) fell through earlier this year but they jumped to 185p on hopes that Whittaker would cough up. It is usually best to hang on in these circumstances where there is genuine hope of a bidding contest. On the whole, the potential upside is greater than the downside. However, it would not be wrong for those of a more nervous disposition to cut their losses and sell up.
