Pension promises hurt BT - time to sell?

Elections are like trains: crowded, noisy and invariably ending up falling short of expectations on arrival.

And I should know. Living as I do out in the rural heartlands, I have spent quite a lot of time with our beloved train network. Sorry, sarcasm there. You can breath easy, though, I’m not going to unleash a tirade about incompetent, unbusinesslike and inefficient British train companies – that would be to risk delivering egg-sucking lessons to random elderly ladies.

But there is a further parallel between electioneering and train companies. They both come up with elaborate and, very often, dubious reasoning for poor service delivery. So just as we are expected to believe the train is yet again delayed or cancelled because the line is littered with the wrong kind of leaves/snow/ animals/imbeciles (delete as applicable), we are also fed nebulous reasoning for cuts in public services.

UK showing the strain

While the Labour Party promises the delivery of a publicly funded utopia and a unicorn at the bottom of every garden, the Tories are filling the gaps in reasoning with absolute whoppers about life in Brexited Britain. We will shortly discover just how far Theresa May has got away with it and, indeed, whether or not the electorate will embark on yet more bonkers voting patterns, as happened on both sides of the Atlantic in 2016.

General Election: Will it pay to keep calm and carry on?

Additionally, within the smoke and mirrors of political manoeuvring, there is yet another parallel between trains and politics that seems to me to be a taboo: pensions. One of the many things that make our train services uninvestible is the ongoing problem with old-style pension schemes.

Similarly, the principal motivation for defence spending cuts is pensions, and the reason we could now fit the regular Army into Wembley Stadium is plainly and simply because of the pensions bill. The standard military contract is 22 years for a full pension. Service people tend to be young, and therefore retire in their early 40s with a gratuity on retirement and an average monthly pension of around £1,100 that is almost endlessly deferrable for someone who may well live into their 80s. This represents a horrible financial problem for successive governments that have to pay these pensions out of current tax income. The same goes for state and public sector pensions.

And the problem often follows through into the private sector, most notably in privatised companies. One of these, it seems – to my great chagrin – is BT. It has endured a shocking year, during which it was fined a hefty £42 million-plus by the industry regulator Ofcom when its Openreach arm was found to have failed to deliver promised services on time (sound familiar?). In my view, the provision of broadband is the key battleground for telecoms companies in the coming decade, and investors clearly believe something is awry at BT. The share has taken a pummelling this year, losing huge ground from its 2017 high of above 392p to just above 300p.

This is disappointing enough for a stalwart of my portfolio, but I now face the lurking spectre of BT’s £11 billion pensions deficit and around £12.5 billion of debt. I fear these challenges – coupled with the massive investment in sports broadcasting rights from BT’s television arm – may be too much even for the highly experienced incoming chairman, Jan du Plessis, to sort out in short order. With regret, I think I will trade out of my quite substantial holding for a time, in favour of something more promising in the medium term.

Calm prevails for now

The stock market in general does not seem to have acquired a case of post-Article 50 jitters, though the same cannot be said for the housing market. I wrote last time about housebuilders, and I continue to keep a keen eye on both Taylor Wimpey and Barrett.

Meanwhile, I am delighted to see there is some action among the banks, with Lloyds shares being reported as the most popular buy among private investors in recent weeks. This has brought the price out of the doldrums and heading once again above 70p. I’ve always said I think it’s worth a quid all day long. Its valuation also looks attractive, something that has caught the eye of respected investor Neil Woodford, who recently bought shares. I shall redistribute my BT holding here, hoping for an 80p breakout, and also add a tranche to my new best friend: the super-divi-paying Severn Trent. Despite a small blip this year, the water company continues to trade gently and predictably upwards and has delivered welcome growth of 16 per cent for me, as well as its tidy dividend.

Finally, one more interesting potential buy has come to my attention this week, and there is some kind of delicious irony in the fact that De La Rue (DLAR) actually makes money – no, it really does print the stuff. With the advent of plastic notes, the firm has just acquired the anti-counterfeiting hologram manufacturer Dupont Authentication, and it looks like a winner at 639p. It has a dividend yield of 3.9 per cent.

So let’s hope the dividend delivers under strong and stable leadership, and doesn’t fall short of expectations – unlike trains and politicians.

Toodle pip.


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