Shares digital

How much would you pay for a share in a company that has just registered a 6% increase in sales and 13% rise in profits, in spite of earning most of its money in brittle dollar bills? A company that has positive cashflows, even after stumping up $500 million for its pension fund, and hikes its payout to shareholders by more than a third and, incredibly, boasts what may be the biggest future workload of any UK company ever, worth £45.9 billion, twice as much as a year ago?

At a time when so many companies seem to be tripping over their own lengthy losses, bleak outlook statements and other jaw-dropping disappointments, what value do investors place on a company with such impressive figures? Answer; about 15% less than they did little over a week ago, now down to 408p.

Such is the fate to have befallen Rolls-Royce, one of the few genuine global champions that the UK can still call its own. If chief executive Sir John Rose feels at all exasperated with the stock market just now, I can fully understand why.

The City seems to be doing a rather natty impression of grumpy old men at the moment. Peeved by how many companies are wheeling out the gloom and doom, even the good guys are getting it in the neck. Profits up, the market asks, but why aren’t they higher? Raised dividends, you say, but where’s our special payout? Confident in delivering more profitable growth in future you reckon? Is that all?

In the case of Rolls-Royce, yes that is pretty much all, unfortunately it failed to post a tenfold hike in profits, perhaps the only thing likely to dislodge the market from its miserable mood.

So why a punishment that looks so out of kilter with the perceived crime? OK, economic uncertainly is leading to global belt-tightening and you can bet that airline profits are going to face stiff head winds as the months roll by, perhaps even leading to a prolonged downturn in civil aviation markets. Rolls also has to contend with the dollar problem, a currency that has spent so long on its sick bed that, were it a horse, it would probably be half way to the glue factory by now.

These are the genuine concerns for a market that always looks to the future, yet these threats have hardly developed overnight. 12 months ago much the same concerns could have been levelled at Rolls, yet the market’s reaction then was to mark the shares higher, to over 500p. This also doesn’t account for the company’s impressive spares and service side, worth 55% of sales now, that provides useful support against economic recession, or the high barriers to entry implied by its global leadership in design, development and manufacturing, skills that even most rivals fail to come close to.

But I suspect this to be all incidental anyway, that there’s something else at the heart of the market’s apparent disappointment. Big institutional shareholders aren’t going to get their bumper cash payout. The City had got it into its head that a big juicy £500 million cheque would soon be winging its way in the post, a reward for all that lovely surplus cash that sits on the firm’s balance sheet, but instead they were served a rebased dividend policy, worth about a tenth of that sum this year. Never mind that credit markets are being squeezed until the pips squeak, or that uncertainty for economies in many parts of the world mean imponderables are stacking up for even the most predictable of businesses – ‘show me the money’, says the City.

Companies used to be applauded for erring on the side of caution, especially in the face of such economic anxiety, management slapped on the back for keeping its balance sheet powder dry for when it was really needed, or for investing back into the businesses to ensure the good times continue long into the future. Yes, as I have said on these pages in the past, raising the level of the annual payout can sometimes become a load too hefty to carry, but I also believe that Rolls-Royce is savvy enough in its dealings with the City to know this, and that its decision to up the annual payout anyway is a genuine judgement call that it will be able to tough out whatever hardships may come its way. Institutions have become far too short sighted, concerned only with their latest quick fix, before moving to the next. This is what has sparked Rolls-Royce shares to slump, and I reckon Sir John deserves a lot of credit for facing down such blinkered vision.

The future is not Orange, but Blyk

The world of mobile telecoms could yet face its biggest threat, from the ‘Men in Blyk’. Already under pressure from falling fixed-line telcos and almost free internet calls, Blyk is a totally new mobile phone service which promises free calls and messaging. Sound like another ‘too good to be true offer’? Well, the Men in Blyk believe different, they reckon users, teenagers in particular, will be happy to have free calls and messaging in return for accepting adverts on their handsets, up to six a day. The Men in Blyk are no befuddled boffins or soulless charlatans either, they’re run by no lesser man than Pekka Ala-Pietila. No, he’s not one of the Jedi masters from Star Wars, but the former President of Nokia, so he knows a bit about mobile phones. What’s more, I am reliably informed that Blyk has got support from many of the industry’s great and good, including Nokia Siemens Networks and Orange. ‘Blyk is as dangerous to mobile telephony profits as lending below cost has been to banks,’ is what the madcap market watchers at Bedlam Asset Management say. It promises to be an interesting story to sit back and watch.