Stock market week: Small investors cold-shouldered in share deals

AFTER their astonishing performances, shares of Halifax and Norwich Union have faltered since the former mutuals produced their results.

There was nothing at all wrong with their respective figures. What disappointed was the predictable lack of corporate action and the surprising rebuff handed out to their army of small shareholders.

Halifax and Norwich had been expected to soak up some of their unwanted treasure chests by handing cash directly to their investors. Instead they opted to buy back shares through the stock market, in effect, by-passing their small shareholders.

Cash rich companies, such as Bass and BG, have created special shares which are then purchased from all shareholders; others, like another former mutual, Woolwich, opted for paying special dividends.

As they are still the domains of small shareholders after last year's conversions, the Halifax and Norwich approach has created widespread surprise.

They are, it will be argued, returning value by reducing the number of shares in issue and therefore improving the crucial earnings per share calculation. But such exercises offer little direct comfort to small shareholders. Improved eps may or may not add a few coppers to the value of their shares.

More importantly they are denied any direct, tangible benefit. What there is goes to institutional shareholders who are in a much better position to sell their shares to the buying company. Obviously the stockbroker handling the share buy-back does not contact, say legendary small investor Aunt Mabel in Harrogate, to pick up few thousand shares; it goes to a source which can be tapped for many thousand - an institution.

Halifax, for example, is buying shares through investment house Merrill Lynch. Its recent deals include blocks of 250,000 and 1.59 million. Shares from a few private investors may have been scooped up in the parcels. But any involvement would be accidental; the shareholders would not have been approached to sell.

How much more democratic, then, for all shareholders to be seen to be treated equally. With a special dividend or specially created buy-back share, small shareholders can see they are not losing out to the might of the City.

Woolwich has managed to perform the trick by paying a special 6.5p dividend. It could, however, blot its copybook. Like Norwich it is seeking buy-back authority. Shareholders could express their displeasure by voting against the necessary resolutions.

The behaviour of the former mutuals is all the more surprising in view of their still relatively modest institutional support. The strength of their shares has been partly due to big investors feeling obliged to increase their holdings in important Footsie stocks.

It is no coincidence that Halifax and Norwich shares have failed to move with Footsie to new peaks. Since the results Halifax shares have fallen from 977p to 910p; Norwich has dropped from 515p to 463.5p. Could some small shareholders be extracting their revenge?

Although blue chips achieved new record levels, last week belonged to the second and third liners with the mid and small cap indices hitting new highs and continuing to narrow the huge gap opened up by their peers.

As NatWest Securities point out, buying mid cap shares can present problems. "There are frequent criticisms of illiquidity or complaints that stocks are too small to make an impact on portfolio performance", say strategists Bob Semple and David McBain. And they point out that capitalisations of the top five Footsie stocks exceed the value of the 250 shares in the midcap index.

Say NatWest: "To overcome these problems investors have to be prepared to increase the number of stocks in their portfolios and take bigger bets in terms of the percentage shareholding -Don't stop at one house builder, buy five".

Investors are urged not to be deterred by big percentage gains "as in many instances they only partially make up for significant relative declines in recent years". And with mountains of institutional cash looking for homes NatWest points out that mid cap ratings "could move well beyond fair value".

NatWest's comments are directed at fund managers. But it is also sound advice for the small player.

Allan Collins at private client stockbroker Redmayne Bentley says until the mid cap revival got underway last month Footsie had out performed by 80 per cent over ten months.

He says before mid caps started to perk up their valuations "were akin to recession conditions at least as severe as the recession of the early l990's".

Diageo, the Grand Metropolitan/Guinness spirit giant, now valued at more than pounds 28bn, heads the week's results.

Its figures, as befits a newly-created colossus, will be complicated but should, at around pounds 1.95bn before exceptional items, support the shares.

There are hopes the results will be accompanied by details of the sale of Dewar's Scotch whisky and Bombay gin, the concessions demanded by regulators. Dewar's could go for pounds 800m; Bombay for pounds 100m.

Pearson could manage year's figures of pounds 300m (pounds 251.8m) and retailer Kingfisher should approach pounds 500m against pounds 390.2m.

Other blue chips reporting include Sun Life & Provincial which is likely to offer pounds 205m against pounds 154.4m; Wolseley with pounds 132m (pounds 123.7m) and Smiths Industries pounds 89m (pounds 80.2m).