Earlier this year we saw record profits from Shell, with BP not far behind. The banking interim reporting season will soon be underway in earnest and, again, good results are expected almost across the board – even now, we can anticipate the headlines of “Bank makes £x per second as overdraft and ATM fees rise”.
Contrary to popular belief, the “invasion” of overseas companies to UK shores in the form of takeover activity has not all been one-way traffic. Indeed, the bias is skewed in favour of incoming takeovers – in the first quarter of 2006 it was estimated that the value of such deals totalled some £19 billion, although this was heavily influenced by the acquisition of O2 by Spain’s Telefonica. “British” purchases overseas in this period were estimated at £7 billion, although again one particular deal (the Old Mutual purchase of Sweden’s Skandia) again coloured the figure.
It is, however, a testament both to the truly free and open nature of the UK market as well as the way UK plc is generally run that attracts investment from overseas in the first place. We have seen that there have been a number of approaches of British firms by the Spanish in particular (Abbey, O2, BAA) as well as the German utility companies continuing to cast admiring glances towards their UK counterparts. This is partly because they already have experience of integrating UK firms, but also because there are no suitable expansion opportunities in their home market.
A quick scan over the FTSE100 proves the point. Over half of the companies in question have dollar denominated earnings, the pharmaceutical companies in particular (Glaxo and AstraZeneca) continue to shake up their US counterparts in their own back yard and many of these companies have an important presence abroad – for example, within the banks, the extraordinary growth in the Asian economies is already benefiting those who have long since chosen to have a strong presence there, most notably HSBC and Standard Chartered. Tesco are dipping their toes into US territory, Royal Bank of Scotland are already established and Vodafone have an extremely profitable and cash generative stake in Verizon, even if certain shareholders are continuing to suggest this stake should be offloaded.
The regulatory regime in the UK has also meant that a number of companies have chosen to list their shares in the UK partly because of the lesser regulatory burden, most notably PartyGaming last year, a FTSE100 constituent for whom the obvious place to have listed would have been the US.
There is, therefore, much to be said for the way the UK market hangs together, regardless of some of the jingoistic comment around international “intrusion” which has been circulating recently. The strongest UK companies are global and powerful in their own right, even though some of them have not necessarily received the recognition they deserve in terms of share price performance.
But what of the real effects of such performances from our top companies? Larger profits mean larger potential dividends for shareholders – perhaps even a special dividend or a share buy back. Larger, successful companies have the option to create jobs, distribute wealth and of course in their strong performance start to contribute more positively to our pensions. UK companies remain leaders in their fields and can compete with overseas competitors in a way which can make the price of the product or service very reasonable when compared to overseas prices (Government taxes permitting).
So, spare a thought that if easyJet ever becomes British Airways, it may well have been a justified rise to the pinnacle of its industry which actually contributes in a positive way to our economy.
If you’d like to read more free research, comment and analysis from me and the rest of my colleagues at Hargreaves Lansdown please visit our website at www.hargreaveslansdown.co.uk
Richard J Hunter
Head of UK Equities
Hargreaves Lansdown
www.hargreaveslansdown.co.uk