FTSE flat, more bullish comments lift IAG, Scottish Mortgage signals £1 billion buyback, CMA looking at Barratt’s Redrow deal and Vodafone to cut dividend again

“Even though Microsoft hit a new record high on Wall Street yesterday, the major US indices found it hard to keep a level footing and that trend extended to Asia on Friday,” says Russ Mould, Investment Director at AJ Bell.

“With the prospect of the Fed potentially waiting until later in the summer to cut rates, investors are getting impatient. The Hang Seng in Hong Kong fell 1.4% but Europe managed to avoid a big sell-off.

“Most of the European indices were flat to moderately high on the last trading day of the week, including the FTSE 100 which traded six points lower at 7,736 one hour into the session.

“Stocks in the energy and basic materials sectors were in demand, albeit the FTSE 100 faced opposing forces from weakness in consumer and industrial stocks.”

International Consolidated Airlines

“International Consolidated Airlines flew to the upper end of the FTSE 100 leader board after investors digested yet another positive bit of news for the company. Analysts are turning positive on the stock and following last week’s upgrade by JPMorgan Cazenove, BNP Paribas Exane followed suit by switching from a negative to a positive view. This follows news earlier this week that Moody’s has put the company’s credit rating on review for an upgrade. A higher credit rating gives investors more comfort over the risks associated with owning the shares.

“The airline has benefited from a recovery in the travel sector following a significant period of disruption during the Covid pandemic. That’s helped to pay down debt, putting the airline in a stronger position.

“Cost pressures have been a headwind and there are big spending plans to renew its fleet, so the airline needs to sustain positive trading momentum. Yet it’s clear why the credit agency is reviewing the company’s rating and investment banks are becoming more bullish as its position has certainly improved over the past few years.”

Scottish Mortgage Investment Trust

“Another big FTSE riser was tech-focused Scottish Mortgage Investment Trust. Once a darling of the stock market during the red hot ‘go-go growth’ phase that was propelled by very low interest rates, the trust fell out of favour after central banks started to lift the cost of borrowing and one of its long-standing fund managers departed. The new team have been trying to make a comeback ever since, but it’s been hard going. The latest bright idea is to throw a massive wad of cash at share buybacks.

“The trust says its portfolio is doing well enough to warrant budgeting £1 billion for buybacks over the next two years. That’s 9% of the entire market value of the trust, making it is a significant commitment. It suggests the board thinks the trust is incredibly cheap – it was trading on a 15% discount to the value of its underlying assets last night.

“However, it also raises a key question – wouldn’t that money be better deployed into new investments to generate future returns? Investment trusts are constantly judged on their discounts or premiums to NAV and Scottish Mortgage clearly wants to lift itself out of the bargain bin.”

Barratt / Redrow

“News that the competition watchdog is looking into Barratt’s planned acquisition of Redrow hasn’t troubled the markets.

“It’s only natural to look into a deal involving two key names, but the muted share price reaction suggests that any potential remedies to get the deal over the line might be small. Redrow is a well-known name in the housebuilding sector, but it isn’t a top tier player.”

Vodafone

“The sale of Vodafone’s Italian business is intended to mark the final step of its European restructuring and to get the company back on a firm financial footing.

“This deal may not be the full stop Vodafone hopes it will be. Earlier steps included the sale of its Spanish arm and a merger of its UK operations with Three – but that merger is being probed by UK competition authorities which have been primed to bear their teeth in recent times.

“The decision to cut the dividend in half from next year is interesting, particularly given the announcement of a €4 billion buyback funded from a portion of the proceeds of the Italian and Spanish transactions.

“While this is a one-off payment, a lower dividend over the long term reduces Vodafone’s ongoing financial commitment to shareholders. This may help put capital allocation on a more sustainable footing, but it does dilute one of the key reasons people hold the shares.

“On a 10-year view the shares are down nearly 70% but if you factor in the total return including dividends this adds up to a slightly less depressing (but still sour tasting) 24% loss*.

“The rebased payout will ramp up the pressure for Vodafone to deliver consistent growth from its streamlined operations, otherwise the position of CEO Margherita Della Valle will come under greater scrutiny.

“Much will depend on its ability to turn things around in its largest market Germany, with very little for the company to hide behind now if it fails to deliver.”

These articles are for information purposes only and are not a personal recommendation or advice.