- Growth For years brokers have sold “growth”. Sometimes it seems everyone is a growth stock even though the last reported GDP growth number came in at 0.6%. This obsession with growth extends to boards who produce results narrative that can talk about growth excessively. Last year I found that the number of incidences of the word growth in a results statement proved to be inversely correlated to the rate of growth in adjusted EPS.
- ROE It is the job of capital markets to allocate capital efficiently and thus high ROE stocks in theory should attract more capital than growth stocks. The only analyst presentation I recall which included a peer group slide comparing peers on an ROE basis was Tullett Prebon and it may well not be a coincidence that Fund Smith’s investment process focuses on high ROE stocks.
- Lenders Nowhere is it more important to prioritise ROE over growth than among the lenders. A lender that incentivises growth at the wrong point in the cycle is increasing the probability of the loan book suffering impairments causing shareholder harm. Provident Financial seems like a good example of this where the quest to grow earnings caused a re-engineering of the business model causing a share price fall of 70% in 2017. The Provident LTIP provides for an award of up to 200% of salary with performance targets based 50% on total shareholder return and 50% on EPS growth.
- Sample I have been through the remuneration reports of 14 largely non-standard lenders and so far have only found two references to ROE. Close Brothers, one of the lenders with a longer track records, weights 60% of managements bonus on ROE, although the LTIP is weighted 40% on targetting 10% EPS growth p.a.. Arrow Global weights 25% of the LTIP on ROE. Other notable incentives are:
IPF – LTIP incentive (up to 250% of salary is 25% weighted to EPS growth and 25% to revenue less impairment growth with the remaining 50% on TSR
Ramsden – LTIP is 50% weighted to EPS growth from IPO to March 2020
Later this week we expect:
- Mattioli Woods – H1 Results – shares 14% down from September high
- S&U – Trading Statement – Shares 23% down from May high. 7 December trading statement was in line so no surprises expected.
- Numis – AGM – shares 42% down from high in September. Markets are slower
- Premier Asset Management – AGM – Shares 33% down from June high. No update expected