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Drop in Dividends Leaves Pensions Exposed?
Submitted by Leo Kolivakis, publisher of Pension Pulse.
Terry Macalister of the Guardian reports 15% fall in share dividends leaves pensions exposed:
British
companies paid out £10bn less in dividends in 2009 compared with the
previous year leaving pension and other investment funds dangerously
dependent on carbon-heavy oil groups, BP and Shell, for a quarter of all such income, new research shows.
A
total of £57bn was handed out to shareholders last year, 15% less than
in the previous 12-month period, with 202 firms cutting their dividends
and 74 paying nothing at all, according to Capita Registrars Research.
The
data shows the financial crisis led to a £6bn fall in dividends from
the banks, leaving drug, tobacco and oil companies to fill some of the
gap.
"The recession has hit dividends particularly hard because
companies have not only had to cope with falling profits, but also
massive pressure on their ability to finance themselves. Preserving
cash has been a top priority," said Paul Taylor, head of dividends at
Capita Registrars, who used data provided by the financial information
specialists Exchange Data International to prepare the report.
"Much
of the banking sector is either in state or foreign hands, while the
ability of the remaining independents to pay dividends is severely
constrained by the need to rebuild their balance sheets... Among
retailers, only the supermarkets have managed to keep the dividends
flowing," he added.
Capita points out
that investors are now "heavily dependent" on just five companies – BP,
Shell, HSBC, Vodafone and GlaxoSmithKline – for 47% of all dividends,
giving those businesses enormous clout in the investment markets and
around government.
Yet Shell faces demands from its own
shareholders to move away from its controversial tar sands investments
in Canada, while the Co-op's investment arm will today unveil plans to
oppose BP's involvement in this area.
"The increasing dominance
of the oil companies has left investors highly dependent on a few big
stocks to provide them with an income," said Taylor. "Oil has fuelled
the engine of UK dividends in the last two years. Lower oil prices,
tighter refining margins, slower production growth and unfavourable
currency trends have put profitability under pressure at the big oil
companies and will make it tougher for them to increase their payouts
to shareholders. Indeed, the latest news from the oil sector may even
mean our forecast for 2010 is optimistic."
Shell reported last
week a 75% downturn in profits during 2009. It said there would be no
further increase in the first quarter of 2010 as the future looked
difficult. BP also gave a downbeat assessment of future trading
opportunities.
Capita believes
dividend payments from UK companies should recover with the economy
over the next year, reaching an estimated £60bn, 5% up on 2009.
Meanwhile,
UK companies raised a record £73bn from new equity as banks and other
businesses fought to rebuild their balance sheets. "There has been an
unprecedented flow of capital from investors to companies," said Taylor.
Investors are also betting on a UK recovery. Daniel Thomas of the FT reports that pension funds pile into UK property:
Pension
funds and other institutional investors committed the most money to the
UK commercial property sector on record last quarter, in spite of
continued fears of a further drop in values this year.
Institutional
property funds raised more than £3.2bn last quarter, dwarfing the
previous peak of £1.7bn collected in the boom of the market in 2006.
This is the highest since records began in 1998.
Official numbers
from the Association of Real Estate Funds show that UK unlisted pooled
property funds attracted £2.9bn in the fourth quarter on a net basis,
much higher than the £400m raised in the third quarter.
The
sudden influx of new capital from institutional investors reflects the
wider shift in sentiment towards UK commercial property, which has seen
a bounce in pricing since last summer after almost halving in value.
Retail investment funds have also recently seen record amounts raised
to invest in commercial property.
John Cartwright, AREF chief
executive, said: "Last year was a volatile year, but it ended on a
positive note with record new money coming in to the funds, as well as
the final quarter showing extraordinary growth in returns.
"This
marks the second quarter of positive net sales, signalling the
resurgence in popularity for property funds. Interestingly, while
retail investors remain active, we have also seen significant new money
from institutional investors who tend to have longer-term investment
horizons."
However, the speed of the
recovery - which has seen capital values grow by 10 per cent in six
months - has led to fears that there will be a second dip in values.
These fears have been exacerbated by weak fundamental reasons to invest
in real estate, with rents under pressure.
Analysts said these
reasons, in addition to pressure from the end of the Bank of England's
quantitative easing scheme, may have meant that the "easy money" from
the bounce could have been made.
Fund
managers, however, say they are investing for the longer term,
typically for more than five years, meaning a further dip would not be
a disaster.
AREF said the net asset value of the sector had reached £25.2bn by the end of last year, down from £26.2bn the year before.
Gross
sales for 2009 were £4.5bn, up from £567.3m in 2008, while net inflows
were £3.2bn, a reversal of funds, given net outflows in 2008 of £224.2m.
The
UK property market stands to gain the most from all this influx of
pension assets looking to scoop up commercial property at attractive
prices. Will this be a great long-term investment? That depends on a
lot of factors, chief among them, will the world avoid a protracted
deflationary episode?
If it does, then it may make sense to
pile into UK and US commercial real estate now. If it doesn't then
pensions will be waiting a long time before they see any meaningful
price appreciation on these investments. The same goes for those
incredibly shrinking dividends.
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So the CAISE now owns Stuyvesant Town - and CPP owns a crap shopping center in Scotland.. I think so far there isn't a real estate deal anywhere that has made money for any pension fund at cash-out because it's only the cash-out that counts.
What's a fund manger to do? A man tells the truth - there are no 8% returns without risk. Pension Funds should look at protecting the capital as their first responsibility
I used to think that US Social Security was the biggest scam going but now I'm not so sure - at least there's a chance the US may at least cut a check to the (very much poorer) retiree (public sector if of course exempt).
Leo - pensions and health care are two items that can't be kicked down the road easily - keep up the good pension work.
They have no regard for downside risk because they're compensated for taking stupid risks, trying to "shoot the lights out". Unlike hedge fund managers, pension fund managers have no skin in the game, so they'd rather bet the farm hoping they can make a killing, and then walk away before it all implodes. They also get to use four-year rolling returns, so the odds are stacked in their favor. Totally ridiculous.
One more thing pal. Your pension buddies are buying other high yielders, things that sell power into the lowest capacity utilization since they been keeping track. They gonna install those solar panels you sell them too.
That explains who bid up the REITs then. Thanks Leo. I don't agree with your bullish stance, but you do provide valuable info.
UK Property is massively overvalued at the moment, there's an uptick in prices because of limited supply and currency deflation. Residential is costed well outside of the average income, Commercial is increasingly standing empty and falling in price - the private sector is still contracting.
the pension funds are going down .. for many reasons not just dividends ..
they have bought horse crap.. large postions in structured real estate deals ... many bets on large payouts for retired.. with large unfunded liabilities ,,
cities , states less revenue to throw at pensions, /
value of future payout .. less because of inflation in the money supply...
will a bankrupt enity be able to continue payments ,, lol
Ah, but pensions will tell you commercial RE and infrastructure assets are a natural hedge against inflation. They won't tell you what happens to illiquid asset classes during deflation. U-G-L-Y!
real estate a hedge against inflation lol
as real estate dives for the next 20 years
commercial , residental down inflation now in no lie terms is close to 8% money supply up 50 percent in some year or so..
shadow statistics
or assets that need loans to sell .. as property at real value not the crap values ,, are down 50 percent in many cases
even the real estate association bought a bldg for 90 mill sold for 60 ..
real estate a hedge against inflation lol
as real estate dives for the next 20 years
commercial , residental down inflation now in no lie terms is close to 8% money supply up 50 percent in some year or so..
shadow statistics
or assets that need loans to sell .. as property at real value not the crap values ,, are down 50 percent in many cases
even the real estate association bought a bldg for 90 mill sold for 60 ..
So what's a Pension Fund manager to do?
Traditional allocations of safe bonds guarantee failure in a world where actuarial projections are made on the basis of 7 or 8% asset growth.
The dividends which used to be paid by financials are now skimmed off as bonuses.
As for real estate, the current returns will produce a satisfactory yield, but reducing rents have a dramatic negative effect on valuation in the future.
But why invest for deflation when all your peers are doing the opposite?
#222257 "So what's a Pension Fund manager to do?"
...Try an onside kick
If you're a pension fund manager, (or really, if you work for any kind of financial services company), you should find a new career.
Financial assets can exist only in a world of inflation. Deflation wipes out financial assets. If there's a quick and brutal deflationary collapse / contraction, then i could see the financial industry coming back on-line to gear up for and service the next phase of credit expansion.
But if they're going to stretch out the collapse over decades - Japanese style - then its better to become a trader. Move to cash + learn to trade options. All the "assumptions" baked into the financial services platforms and products that have been sold to pension funds, retirement funds, retail 'investors' etc are destined to become worthless. Unless you look forward to decades of asset failures, negative returns, shareholder lawsuits, congressional hearings and special prosecutors, i'd get the f* out of that business.
Leo-
Get this through your head - Pensions = Ponzi
They are by definition always exposed because there is no mathematical way for them to stay solvent over the long term in a ponzi economy.
"I am an oil man"
This shouldn't be hard to figure out.
Now that the credit balloon is no longer expanding, we're facing decades-long deflationary contraction.
Financial assets get wiped out because there's no longer a source of new cash to feed all the rents.
Income goes "poof" - along with dividends, bonds, etc. etc.
There are plenty of shorting opportunities - but our average Schmo walking around with some basket of mutual funds is going to be left with nothing- nothing but a sack of corn husks. not realizing that the bankers ate all the corn already.
As we all know, the baby boomers are driving a large part in our economy. They live from dividends, spend on luxery goods...
now their purchasing power is much lower, we still need to see the impact on the luxery industry, as this disapearing div. culture is just now kicking in.
Good post Leo. And an excellent case against stocks. This is the reason I won't own equities, no yield. When the yield comes back (via prices cratering, as it sure ain't going to happen via earnings growth) then I'll selectively buy.
Not until then, which I see as about 3-5yrs away.
Holding only fixed income assets might be at times as bad of an idea as holding only equities. Also, you ve got to keep in mind that if rates will unexpectedly go up most of the fixed income but tips and very short duration funds will get hit rather hard.
Leo, how do you justify going long on this market if you publish so many panicky articles about the pension funds ? If things are so bad for them arent they bad for the market as a whole ?
#222051
He is no different than any other bullish advisor, he is drinking the koolaid and he believes all the standard Wall Street jive talk..... "Don't fight the Fed", "first year Election cycle", "liquidity driven rally",cyclical bull market.... It's all Horse crap.
I had the some thought.
Since AGW is now nothing more than a scandalous fraud. The U.S. needs to subsidize offshore drilling on both the East and West coasts. Then let 90 cent gasoline help pull us out of this recession.
Or we could, you know, put some money into the technology that will finally let us move past our dependence on oil. Even if (I don't) you think global warming is bogus, you can't deny that eventually the oil will run out, and the countries which position themselves appropriately will be better off than the ones that 'drill baby drill' until there's nothing left. I'd rather ruin our coastlines with wind platforms that will run forever with proper maintenance than oil rigs that'll be defunct in 25 years.
"However, when the pension masters in the UK, US or anywhere else go all in on a bet, it's immoral."
True , however there are number of things that might be classified as immoral - state of CA fiscal health hijacking by unions, and baseless unreasonable promises by firms, states, governments related to pension benefits.
At any rate, you ve got to remember that if pension masters would be reasonable, they would be fired for poor performance goals and strategies.
What makes the above even worth, the whole situation in addition to be immoral is plain stupid...
It all depends on the time of the purchase of original investment. (yields are pretty high right now) However since the pensions are long term investors, the above makes perfect sense and should have been expected.
At any rate, the pressure on our interest rates might come from overseas (a dumb policies that came way too late and will just add oil into fire could have been expected as well.) -
"Eastern Jiangsu (China) province, which exports more than Brazil and South Africa combined, raised its monthly minimum wage rate 13 per cent to Rmb960 ($140) last week. It was the first time the rate had been adjusted in two years."
It's simply an inflation over deflation bet ... but it's just that ... a bet. The whole global economy is now on a thinly supported speculative risk binge, because any compulsive gambler will tell you the power of 'getting even' exceeds the fear of 'losing it all'
However, when the pension masters in the UK, US or anywhere else go all in on a bet, it's immoral.
Thanks for the post ... we in the US need to keep a global perspective because, ultimately, we are currently all in and hoping that the fumes will restart the car.