UK: Out with earnings per share, in with shareholder value. (3 of 3)

UK: Out with earnings per share, in with shareholder value. (3 of 3) - Unilever, the soap, food and chemicals conglomerate, shows another increase in EPS masking a drop in shareholder funds. Sir Michael Angus, the down-to-earth chairman who retires next

Last Updated: 31 Aug 2010

Unilever, the soap, food and chemicals conglomerate, shows another increase in EPS masking a drop in shareholder funds. Sir Michael Angus, the down-to-earth chairman who retires next May, saw last year's profits rise by only 5%, to £1.8 billion, in marked contrast with the 20% per annum which he has pulled off in previous years. Difficulties in the United States, where Lipton clipped £20 million off profits, were compounded by a falling dollar, while Japan proved no easier a market. Detergents, personal products and frozen food came under fierce competitive pressure; the cost of new launches only added to Unilever's problems. A well publicised £195 million extraordinary provision for restructuring its European operations further reduced the company's profits, and shares have responded accordingly, increasing by some 4% less than market competitors' since the turn of the year.

At Blue Circle, Britain's biggest cement maker, EPS soared to new heights before flattening in 1988-89. Meanwhile shareholder funds made a brief comeback from their 1986 low, only to continue their decline. Paying over the odds for lawn mower manufacturer Birmid Qualcast in 1988 and boiler maker Myson in 1989 did nothing to replenish shareholder value. Nor, incidentally, did it reassure the City of Blue Circle's strategic direction.

But it is electronics giant GEC which illustrates the most dramatic U-turn of all. Though its assets did not grow in 1990, its liabilities did. GEC forked out a total of £1 billion in goodwill for the purchase of subsidiaries, and shareholder value plunged by some 35% from its 1989 peak.

Many must also be wondering whether the £2 billion tab which GEC-Siemens jointly picked up for the purchase of Plessey was altogether too high, especially in light of Plessey's more recent performance. Profit expectations in the region of £200 million proved optimistic, with pre-tax profits around only £130 million for the 1990 year.

If the normally shrewd Lord Weinstock is regretting the deal, he does not show it. But the spate of joint ventures and strategic alliances into which GEC has entered is causing the City some concern. Lord Weinstock may have succeeded in making GEC bid-proof, but whether he has made it bigger and better is a very different matter.

To put these figures in perspective, it is only fair to point out that the past year has proved particularly bumpy for business. A Financial Weekly survey in August 1990, in which Geoff Smith was also involved, shows that of the 140 alpha stocks listed on Datastream, only 42 companies increased shareholder value by more than the rate of inflation. Williams Holdings was among them; Hanson and BTR were not. Hanson had slipped from ninth to 46th in the league, with an increase in shareholder value of 8.4%. BTR had fallen to 62nd place with an increase of 4.59%. Ironically it was Polly Peck which topped the list and then fell off the financial precipice.

The concept of shareholder value will not make the individual shareholder king. On the contrary, that role is reserved for the great god Cash. But it does provide a more accurate means of monitoring a company's performance and, above all, of identifying those strategies which will add most value.

In fact developments in the retail sector provide a graphic analogy; selling increasingly sophisticated convenience foods has proved a highly lucrative means of adding value. The mark-up on chicken a l'orange is of course substantially greater than it is on the traditionally naked fowl. Lord Hanson and his peers have applied the same principle of maximising value, and though the assets of such managers may not actually be cooked, they are undoubtedly made to sweat very much harder than they once were.

In the absence of companies which conform to this view, the occupants of the number 37 bus would do well to develop the Abbey habit. They might also remember another Twain saying: "October is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February."

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