Comment: Forget spaghetti, show us the dividend

IN DAYS long gone, company results statements were a useful tool for investors. We could see more clearly, once. But after the march of the transparency and disclosure brigade the results from Lloyds Banking Group are well-nigh indecipherable.

Bill Jamieson

Take, for example, the simple question: did this banking giant make a profit or a loss last year? The snap headline number looked impressive: “underlying profit” soared 140 per cent to £6.2 billion. “Core underlying profit” was up 24 per cent at £7.6bn”. Impressive, you might think, fully entitling Antonio Horta Osario to his maximum annual award of £2.38 million, equivalent to 225 per cent of his £1.06m salary.

Less impressive, however, is a line called “statutory profit before tax”. And after asset sales, liability management and volatile items (£280m), simplification and Verde costs (£1.5 bn), “legacy items” (£3.4bn) and other items (£499m) this comes to £415m.

Take away tax of £1.2bn and Lloyds made a loss for the year of £802m.

Confused? Read on. The core Tier 1 capital ratio looks good at 14 per cent (up from 12 per cent) but (and I quote) “the pro forma loaded CRD 1V leverage ratio including Tier 1 instruments” is just 0.3 percentage points better at 4.1 per cent.

This heaped spaghetti bowl of numbers would give ace Sicilian detective Montalbano indigestion for life. Yet this is the document that will form the basis of a prospectus for the offer for sale of shares to the public – who, of course, already owns them. It is certainly clear that the banks have now joined life insurers in providing financial information barely anyone understands. After page 10, I was wilting. My reaction was akin to Lord Palmerston’s pithy summation of the Schleswig-Holstein question: “One’s dead, one’s mad and I’ve forgotten.”

I do not doubt that Lloyds Banking Group is on the mend, but the only reality in companies as complex as this is dividend payments. And Lloyds, while finding yet another £395m for bonuses, is still not paying one.

And it is the level of dividend – the one concrete reality amid the mountains of ratios and figures that ultimately matters – which will have a critical bearing on the public appetite for its shares.

In 2009, I wrote that our stricken banks would re-emerge as heavily regulated utilities whose stock market appeal would rest on dividend-payment capacity and market assessment of the sustainability of the dividend pay-out.

That has proved all too true. Lloyds is going to need a cast-iron yield of six per cent or more if deeply sceptical private investors are to give them a second look. Even ignoring the insult that yet another banker bonus hand-out delivers to the owners of the business, today’s shares at 80.4p, up from a 12-month low of 46.3p, are already taking a very great deal on trust.

Smaller company surge

BY far the clearest stock market winner over the past year has been the smaller companies sector. It has defied worries over poor bank lending, sluggish business investment and a markedly cautious business mood to outperform the FTSE 100 and FT All Share by a generous margin. Over the past year, the FTSE All Share is up 11.25 per cent, and just 0.12 per cent up from the level recorded on 22 May.

But it has been a notably different experience for smaller company funds. Research by the Trustnet website shows that they have risen by 31.5 per cent for the year and are up almost 23 per cent since the 22 May peak.

Looking at the smaller company’s investment trust sector, the Standard Life UK Smaller Companies Trust has risen by 37 per cent over one year and by 322 per cent over five years. Henderson Smaller Companies Trust is up by 41 per cent, while Aberforth Smaller Companies Trust and Blackrock Smaller Companies top the performance tables in this category over the past 12 months with rises of 54 per cent and 51 per cent respectively.

Two features have been evident. One is the ability of smaller companies to perform despite an overall contraction in lending to businesses.

The second is the resilience of the sector and its relatively low volatility – this for a category sensitive to changes in investor mood and when markets have been apprehensive over the end of quantitative easing.

But some believe that we are seeing a change in the nature of the market which could lead to this outperformance continuing. The fallout from the credit boom and bust of high debt and sluggish economic growth means that investors will turn to smaller companies for ideas. And information technology enables smaller companies to reach global customers more quickly.