What can be done about the underperformance of British shares
By John Lovell
Shares in the UK stock market have underperformed their counterparts in Europe and the United States for the past few years. British companies certainly have some strong headwinds operating against them at the moment. What can the companies themselves do to maximise their share price?
A feature of the investment landscape of the last three years or so has been the underperformance of shares in UK companies, compared to shares in European and American companies. The price of a company’s share matters greatly. Apart from keeping shareholders happy it delivers all sorts of benefits to the company itself, giving it the freedom to shape its own destiny and providing the firepower for expansion.
In the last 12 months, the FTSE100 is up a respectable 14% but European stocks have fared much better over the period. The French CAC40 is up 29.8%, the German Dax is up 19.78% for example. The S&P 500 is up 21% over the last 12months. It is not a case of European and American companies offering better returns and this is borne out by looking at the P/E ratios (price to earnings). The FTSE USA (composed of US large and mid-cap stocks) has a current price to earnings ratio of 22.3 and a 10 year average of 16.8. FTSE Europe ex UK has a current P/E ratio of 18.1 and a 10 year average of 13.7. The UK on the other hand with its FTSE 100 has a current P/E of 13.5 and a 10 year average of 13.0. Source FTSE Russell/Refinitiv data at May 2021.
Some headwinds but the growth is there
The UK is certainly facing a number of problems, some of them self-inflicted. Wage growth caused partly by the exodus of European workers is feeding through to higher inflation, energy costs are trending sharply upwards and the ongoing effects of Covid 19 is affecting productivity and causing supply chain shortages. The composition of the UK stock market also affects sentiment (too few big tech stocks and too many old economy resources businesses).
Nevertheless, the UK economy is growing well. In Q2 of 2021, UK GDP grew by a respectable 4.8% compared to the previous quarter whereas Eurozone GDP increased by 2.2% and US GDP grew by only 1.6%. Indeed, in a recent survey by Lloyds Bank, 88% of British companies surveyed expected UK growth to improve next year (up from 20% in 2020) while 32% believed the UK will achieve stronger growth than other G7 nations up from just 7% last year.
Understand investors' core criteria
So what is it that is going to make growing numbers of international investors put their money into UK stocks which will in turn drive share prices upwards? A track record of earnings growth is important, so too is the dynamics of the industry sector but ultimately it is the future prospects of a company that can lead investors to pay a higher price to acquire shares.
Fund managers and analysts may differ in the exact criteria they use when evaluating a company for investment but in addition to pricing they generally look for the sustainability and prospects of a company’s business model, the skill and experience of the management team, the long-term attractiveness of the industry that it operates in and increasingly a favourable outlook and management of environmental, social and governance factors. Legendary American investor Warren Buffett sets great store on the barriers to entry into an industry (the moat) while top UK fund manager Terry Smith of Fundsmith selects investments on the basis of a company’s ability to earn sustainably high returns on capital and earn above-average gross margins.
Given the above criteria, one would expect senior management and communication teams to prioritise providing examples of how their company excels in all these areas. Yet our own research at Comprend shows that in many cases, British firms are not providing enough information on their own company’s performance and prospects.
Yet when UK companies are subjected to intense scrutiny, particularly by private equity and foreign predator companies, the additional value can be found. Consider the case of supermarket operator Morrisons. In the first half of 2021 Morrison’s shares were trading around the 175p level but with two American private equity companies fighting over the business, the shares have risen to the 290p mark. It is a similar story with recent takeover target Meggitt. It is estimated by American law firm Mayer Brown that US private equity funds have made 65 UK acquisitions in the last year, up 57% in a year.
38% of required content is not good enough
So if increasing profitability is not an answer by itself, what else can be done to increase shareholder value? Looking at the information that a company provides from our annual Webranking surveys against what investors, analysts, financial journalists and other stakeholders would like to see is instructional. We see the average score for those sections that are critical for an understanding of a company’s prospects and the scores are very low and in most cases lower than their European counterparts.
For example, the top 200 UK companies (by capitalisation) scored an average of 38% against 44% for European companies. So UK companies are missing out on some 62% of the information that audiences want to see.
We can see how 200 of the UK’s largest companies scored on average in our latest Webranking survey in comparison to European companies against the various categories of information. We set out below scores from the survey for some of the more important categories. Webranking by Comprend identifies more than 400 points of information that a company should be disclosing in their corporate communications. If UK companies are only including 38% then that represents a lot of missing information.
|UK||Europe 500||UK||Europe 500||UK||Europe 500|
|Investment story||35%||30%||39%||33 %||33 %||32 %|
|Financial targets and achievements||8%||13%||10%||16%||7%||13%|
|Sustainability strategy||67%||69%||58%||65%||67 %||70%|
Simplicity is key
It is not only the information that is given, it is the way it is presented. Financial journalist John Authers in his recent newsletter Bloomberg reported that a recent survey by Nomura showed that those companies that used clear and simple language in their results briefings outperformed those who used jargon and long complicated sentences. His report examines findings by analysts at investment bank Nomura which studied the language used by executives at America’s biggest companies when briefing at earnings calls. Nomura used a readability tool to rate these briefings for complexity, choice of words and sentence length. The Nomura survey found that over the past three years, the companies with the simplest language have returned 19.2% annualized, beating the equal-weighted Russell 1000’s by 15.7%. Those with the most complex language returned just 13.4%.
Providing all the information that fund managers, financial journalists, analysts and individual investors want to see and presenting that in a clear and concise matter will make it easier for them to decide on the investment merits of a company. If it is easy to access, then that information is going to be taken notice of. Conversely, if a company fails to provide detailed information about its strategy and future growth prospects, the chances are that those important audiences will pass on the opportunity to invest.
Read more about the UK results in Webranking by Comprend 2021-2022