Investments

Where are our home-grown tech giants?

When it comes to technology, it seems the most recognisable companies are more often than not American. Most investors can name the industries dominated by Facebook, Google, Apple, and Microsoft in an instant. In fact, emerging names like Tesla and Airbnb are also American.

Tech names from other parts of the world are quickly gaining ground. In recent years, Alibaba, Softbank, and Spotify have all managed to establish their brands as global household names. However, investors would be hard-pressed to name a British tech giant on the same scale.

Until 2016, the UK’s biggest technology company was Cambridge-based ARM Holdings. Most smartphone and tablet users still have no idea that the the technology developed by this group of engineers powers more than 85% of all mobile devices (Richard Beddard, Money Observer, February 23, 2016). Unfortunately, Softbank’s acquisition of the company in 2016 took it off the London Stock Exchange, forever depriving retail investors of the chance to bet on the growing market for Internet-of-Things (IoT) devices and robotics.

The technology stocks that remain listed on the LSE are either so niche that most investors haven’t heard of them or so small that they stand little chance against their Chinese or American rivals. However, there are some companies that have the potential to dominate their niche. The fact that British technology remains overlooked and undervalued presents an opportunity for investors willing to take a closer look.

Accesso (AIM: ACSO) is a great example of this. Currently worth half a billion pounds, this AIM-listed stock is far from a global technology giant, but its software tools power the guest experience at some of the most recognizable tourists attractions in the world, including Alton Towers and Legoland (Steven Frazer, Shares Magazine, 19 Feb 2015).  

Other interesting tech stocks include gene therapy research firm Oxford Biomedica (LSE:OXB), ID verification services provider GB Group (LSE:GBG), and robotic process automation solutions provider Blue Prism (AIM:PRSM). Just Eat, the online platform that revolutionised takeaway food delivery, just entered the FTSE 100 for the first time last year. Valued at under £4 billion, JustEat (LSE:JE) is arguably Britain’s most well known tech success story (Josie Cox,Independant, 18 December 2017).

Meanwhile the UK is home to 22 out of a total of 50 European unicorns (startups worth over $1 billion) (Jonathan O’Callaghan, Alphr, 30 Apr 2018).  Many of these startups are focused on emerging technologies like biotech artificial intelligence (BenevolentAI), virtual simulations (Improbable), and online food ordering (Deliveroo).

Investors trying to bet on home-grown technology could either take a closer look at underrated tech stocks or wait for these exciting unicorns to open with investors in the near future.

The value of investments and income from them may go down as well as up and you may not get back the original amount invested.

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Good governance is the unsung hero of investment returns

Management strategy, successful products, economic growth, and low interest rates are often the core drivers of investment returns. Sometimes, experts will go as far as to commend the corporate culture or CEO’s vision to explain the abnormal returns from a stock. However, investors tend to overlook the importance of good corporate governance.

Robust corporate governance is the antidote to an issue academics like to call ‘the agency problem’ (Sunit Shah, CFA Institute Research Foundation, 1 March, 2014). The agency problem is an inherent conflict of interest between those who run the company (management) and those who own it (shareholders).

The owner-manager relationship is fraught with misaligned incentives and asymmetric information. The responsibility of closing this gap and resolving the conflict lies with the shareholder-appointed board of directors. A healthy dose of oversight from an independent board could check the management’s tendencies to waste resources, cut corners, overpay themselves, or dilute the stock.

The board promises to uphold the rights of shareholders and safeguard their interests. It seems intuitive that stronger oversight and shareholder rights should lead to better performance. Indeed, recent studies have managed to establish this link.

A study of shareholder rights at 1500 large firms during the 1990s found that companies with a better score on the ‘Governance Index’ made fewer corporate acquisitions, had higher profits, lower capital expenditures, and better sales growth (Gompers et al., Quarterly Journal of Economics, February 2003). In other words, the value of the firm was noticeably enhanced by better governance.

Fortunately, measuring corporate governance at publicly-listed companies has become easier with the Institute of Director’s annual publication of the Good Governance Index (GGI). The GGI measures corporations based on 47 different governance indicators ranging from the percentage of CEO pay in stock to the frequency of board meetings every year.  In the latest report, Diageo Plc. came out on top with a score of 837. GlaxoSmithKline Plc. scored the least - 627 (IoD, Good Governance Report, 2017).

The GGI provides a window into the boardroom for retail investors. Leveraging these tools could help investors monitor their company managers more closely, mitigate the risks and moral hazards of owning a piece of a large company, and perhaps enhance their investment performance.

The value of investments and income from them may go down as well as up and you may not get back the original amount invested.

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Measuring Dividend Quality

With fixed income yields at record lows across the developed world, income-seeking investors have had a tough decade. Ever since the financial crisis of 2008, the yield on government 10 year treasury bonds has tumbled from around 5% to 1.68% (investing.com). The hunt for income over the past decade has led investors to either buy-to-let properties or dividend stocks.

A number of FTSE 100 companies pay dividends many times greater than the income from fixed income securities. Most of these are household names. Vodafone, for example, pays out nearly 9% of its current stock price in dividends. Similarly, National Grid, Marks & Spencers, and the Royal Mail PLC offer dividend yields of 7.58%, 8.18%, and 9.51% respectively. The overall FTSE 100 pays just over 4% in dividends (David Brenchley, Morningstar, 23 April, 2018).

Such handsome dividends coupled with the opportunity for price appreciation make dividend stocks an ideal asset class for income seekers. However, investors need to take a closer look to ensure the dividends are sustainable. A sudden plunge in the stock price or an unexpected cut in the annual dividend payout could negatively impact the total return from these stocks.  

It is essential to establish a connection between a company’s dividends and its underlying economics. Companies need to have adequate annual earnings to cover their expected dividends. A dividend coverage ratio (net income divided by dividend) of greater than 1 is absolutely essential. Firms also need to have adequate cash, low debt, and healthy growth prospects to sustain the dividend long term.

Another important factor dividend investors must consider is the management’s philosophy. A number of cash-rich and stable businesses do not offer a dividend because the management believes it can generate a higher return for shareholders by reinvesting the free cash flow back into the enterprise. The most prominent example of this is Warren Buffett’s Berkshire Hathaway, which has never paid a dividend in its 54-year history (Aristofanis Papadatos, Seeking Alpha, Feb. 28, 2018). That’s despite the fact that the company’s cash hoard recently reached $116 billion. With this in mind, income-oriented investors need to pay close attention to a change in management or its dividend policy.

A well-diversified, high-yield dividend portfolio can help investors who rely on their investments for income. However, the cash flow from dividends is often unpredictable over a longer time horizon. Investors need to periodically check the financial health of the business to ensure their quarterly payments are sustainable.

The value of investments and income from them may go down as well as up and you may not get back the original amount invested.

The value of investments and income from them may go down as well as up and you may not get back the original amount invested.

Back