In this week’s Commercial Awareness update, we discuss record dividend payments, Snapchat’s shares crash, the tech company set for the $2,000-a-share club, JP Morgan’s 13% rise in profit and whether austerity should continue.
1. Record high dividend payments
The second quarter was an excellent month for investors, as UK companies paid a record £33.3 billion of dividends between April and June – up 15% on the previous year. A dividend is a proportion of a public company’s earning distributed to their shareholders and, due to strong profits across a wide range of sectors, these are at their highest level ever. The lower value of sterling has also had a significant impact, as many firms pay dividends in euros or dollars, which are now worth more when converted to pounds. This only accounts for around 7% of the uplift, with the rest largely coming from big corporations making special pay outs – for example, National Grid paid out £3.2 billion after the sale of its UK gas distribution business.
According to data from Capita Asset Services, the UK is on track for £90.6 billion worth of dividend payments this year, which would be 7% up on last year and a record year.
Questions to ask yourself… Are large dividend payments a sign of economic strength? Who benefits most from a weaker pound?
2. Why did JP Morgan’s stocks fall despite rise in profits?
Last Friday, JP Morgan Chase reported a 13% rise in profits during the second quarter, taking their quarterly profit to $7 billion. Overall profits at US banks have been boosted by recent hikes in interest rates by the Federal Reserve (which means they make more from lending), with both Citigroup and Wells Fargo also announcing stronger than expected results on the same day. The key driver behind this uplift comes from strong gains in loans and deposits.
So why did the share price go down? When a company releases earnings’ results which beat market expectations, their share price tends to go up. However, JP Morgan’s share price fell by 0.9% - there appear to be two main reasons for this. Firstly, profits declined in their most important divisions, most notably trading. A lack of market volatility and less client activity have been cited as the main reasons for this. The second is to do with the release of economic data which suggests the US economy will grow less than the Federal Reserve previously forecast – less growth will likely delay interest rate hikes, which lead to increased profitability for banks.
Questions to ask yourself… Do banks do better in times of market volatility? Could there be other reasons why some company’s stocks fall despite strong results?
3. Snap Inc.’s shares drop
Shares in Snap Inc. – owners of Snapchat – fell below their Initial Public Offering (IPO) price of $17 per share last week, as their first quarter results show a stalling in growth. When first floated back in March, the stock climbed 44% in the first day, reaching over $26 dollar per share (and a $30 billion capitalisation). This valuation was a surprise to many as Snap Inc. generated just $404 million in 2016, with many experts believing it was significantly overvalued. Snap Inc. is struggling to keep up with the rate of growth needed to become profitable and the latest results show revenue actually declined in the first quarter, compared to the previous one. What’s even more worrying for the social media app is that the number of daily active users rose 5% - significantly less than their targets. The underwriters of the company’s IPO, Morgan Stanley, downgraded its target share price* to $16 per share (down from $23) on the back of this news, sending the share price spiralling.
In other tech news, one stock is about to hit $2,000 per share… and it’s not Amazon. The online travel site Priceline Group are about to achieve this feat, becoming the first tech stock ever to reach this height. The share price has risen 33% this year as they join an exclusive few in the $2,000-a-share club, including Warren Buffett’s Berkshire Hathaway. Priceline owns a number of online travel booking websites, such as Booking.com, but don’t often get the exposure they possible merit. According to a number of measures, they have grown faster than tech giants Amazon, whose stock is currently trading at just over $1,000 per share.
*Target share price is what the share price is predicted to be in a year’s time.
Questions to ask yourself… Can Snapchat justify its valuation? How can Snapchat create something that can vastly increase their market share?
4. OBR calls for continued austerity
The Office for Budget Responsibility (OBR) has warned against ending austerity, as weaker growth rates, higher interest rates and inflation pose significant risks to public finances. The fiscal watchdog suggests the government’s current finances would fail the stress test which is applied to banks – they suggest increasing borrowing at this time would put Britain in an even weaker position if market conditions were to change. They found that Britain’s finances would face “severe” effects in the case of a mild recession or a slight drop in the value of sterling.
If the economy slows, the cost of borrowing for the public sector will get more expensive (increasing the deficit). Based on today’s predictions, debt would have increased by £600 billion in the current five-year parliamentary term and Brexit could worsen the situation. The economic impact of losing access to the free market is likely to lead to an increase in borrowing.
Questions to ask yourself… Should the government continue austerity measures? Is higher personal taxation a viable way to decrease the deficit?