BT's dividend signal

In Topic 9 of the second edition of the book I took a look at the very important subject of dividend policy. In the introduction to this section I discused the clientele effect and the information that can be contained in the dividend announcement. A good example of these two factors in practice came along in last Friday's FT (page 20 Companies and Markets) with Andrew Parker discussing BT's latest figures which showed a 71% increase in pre-tax profits for 2010/11. However, of even more significance for their shareholders was the group's hint that dividend policy might be more generous in the future as a result of a sharp fall in their pension fund deficit. With the company generating £2.2bn of free cash flow it was able to raise the annual dividend by some 7% to 7.4p per share. This was contrasted with BT's decision to cut their dividend payouts two years ago due to lower than expected earnings and the need to increase the company's payments into the pension fund. It is now expected that the pension scheme is in far better financial shape and it is against this background that the company can now look to signal a more generous dividend policy in coming years. So if we take the dividend announcement as "an important signal to investors" BT is presenting an optimistic viewpoint.

UK Borrowing pressures ease (a little!)

The latest data just published shows that the UK Government has borrowed less money from the financial markets than had been expected. The hard figures revealed in today's FT (page 2, FT, 1/9/10) indicates that the UK will now borrow some £45bn in the next four months as opposed to the expected £55bn in this period. The borrowing process is managed by the Debt Management Office (DMO) and it has taken advantage of the strong demand from large institutional investors and consequently sold more UK bond issues than was initially scheduled at this stage of the financial year. This has been made easier by the sharp fall in UK bond yields which has resulted in lower government borrowing costs. According to the FT article the average yield fell to under 3% at the end of June 2010. You can read more about the underlying economics of Government finances in Topic 11 of Reading and Understanding Economics.

German GDP points to better times ahead in the eurozone...

In a week of generally bad financial and economics news stories there was a glimmer of hope on Friday with the release of better than expected data with a pick-up in German economic output resulting in a 1% rise in gross domestic product (GDP) across the eurozone. However, the detailed numbers showed a sharp contrast between the robust data from Germany and France and the continued weakness in the so called "Club-Med countries" like Spain, Italy and Greece. This prompted an excellent story in the weekend FT with the author (Stanley Pignal) pointing to the emergence of a divided eurozone with the healthy core countries and the much weaker southern zone in dire trouble. It seems that while the likes of Germany have enjoyed a surge in exports resulting from the depreciation in the euro the same cannot be said for countries like Spain who predominantly trade within the eurozone. Against this background the next few months could see a period of further pressures on eurozone financial markets as investors remain concerned about the financial state of many of the weaker economies.

Celtic tiger out of recession!

In Article 17 of Reading and Understanding Economics I have given a definition of an economic recession (page 121) and then this is discussed in relation to the performance of the US economy at that time. Remember that economists define a recession as a severe economic slowdown normally defined as two or more successive quarters of negative growth. The recent data has just shown that the Irish Republic officially moved out of recession in the first quarter of 2010 with the latest data showing that gross domestic product grew by 2.7% during that period compared to the last three months of 2009. However, there is little real cause for optimism in relation to their other economic data. The number of people claiming unemployment benefit rose by 5,800 in June to hit a total of nearly 445,000. That left June's estimated unemployment rate at some 13.4% of the labour force.

Growth in India still robust but worries about the negative impact from the Eurozone

In these worrying times for the Eurozone economy it might be encouraging to see that India's economy grew at an annual rate of 8.6% in the three months to March 2010. This economic strength was largely based on a buoyant manufacturing sector. This data will support a continued tightening in monetary policy with the Reserve Bank of India (RBI) likely to raise interest rates further in coming months. It has already moved interest rates higher in March and April in an attempt to curb high levels of price inflation. The worry for the Indian economy must be that it starts to suffer in the wake of the sovereign debt crisis hitting the European economy. If these governments continue to raise taxes and cut public spending this is likely to have a domino effect across the globe with trade levels suffering and consumer confidence hit badly.

Eurozone unemployment trend deeply worrying

In Topic 9 of Reading and Understanding Economics I examine macroeconomic policy. This includes articles on unemployment, inflation and economic growth. In the introduction I explain that high employment is a key policy goal for many governments across the globe. Sadly the latest data from Spain shows that key parts of the European economy are suffering badly. Spain's unemployment rate has hit a staggering 20% for the first time in nearly 13 years.
The jobless rate in Spain has risen sharply during the economic downturn and is the highest in the eurozone. The latest data shows that the overall eurozone unemployment rate remained unchanged at 10% in March. This means some 16m people are unemployed across the eurozone. These figures show the real cost of the economic recession in terms of the impact on the eurozone labour market.

New measures for inflation...

In Article 16 (page 111) I set out to show how inflation is measured in the UK. When you read the analysis of this article you will see that there are three different measures of inflation published by the office for national statistics (ONS). The main measure of inflation is the consumer price index (CPI) which the Bank of England is supposed to keep at annual rate of 2%. This measure is regarded by many commentators as being a far from perfect figure as it excludes the housing costs which have been such a very important economic variable in recent times. On the 15th March the ONS updated the basket of goods and services that are included in the calculation of the CPI. In came hair straighteners, lip gloss and still mineral water and out went toilet soap, baby food and pitta bread. Based on this information I am even more convinced that the ONS bases the annual re-weighting exercise solely on my own household spending. With a wife and two University-age daughters I can count three hair straighteners currently around the place while it is a long time ago that baby food featured in our shopping baskets! If you want to find out more information about the re-weighting go the following website www.statistics.co.uk. Have fun!