UK companies take their destinies in their own hands
- 05 March 2025 (3 min read)
Given the lack of any macroeconomic triggers for a change in sentiment on UK equities – at least in the short term – shareholders and management in UK companies are taking it into their own hands to influence market dynamics.
Ultimately, company fundamentals and compounding profits are what drive equity valuations; economics and geopolitics can be a huge distraction. However, the UK equity market has become incrementally cheaper versus its own history and other international equity markets, in particular the US, as global investors have reduced allocations over the last decade or so.
After the UK general election last year, there was a feeling that the stars were aligning, and a re-rating of UK equity was imminent. In hindsight, this was over-optimistic, at least in the shorter term. While the government has made a number of policy announcements that have the potential to promote growth, these will take time to create a meaningful change in dynamics.
Getting their own houses in order
In the meantime, proactive actions being taken by companies themselves are helping to boost returns. It is as though management teams have gone through a process of grief and are finally accepting that their share price is not the brokers fault and something proactive needs to be done about it.
In our own meetings with companies, we are increasingly seeing management seizing opportunities to make fundamental changes as a way to drive shareholder value. There is an overwhelming sense that companies can either sit and wait for market sentiment to change or take control of their destiny and force a change of view. When the rerating comes, it will find a market made of companies ready to face forward and embrace growth, which can only be good news for investors.
Actions we have seen recently include:
Corporate restructuring
As well as acquisitions, companies are taking a hard look at their offerings to make sure that they are focusing on the fastest growing, highest-return parts of their business. Activities that don’t cut the mustard are being cut.
This can be seen in large and small companies. On the large side, Unilever has demerged its ice cream division, while Legal and General sold off its US protection business and 20% of its US Pension Risk Transfer business to Meiji Yasuda. Mid-sized and smaller companies that are slimming down include Ascential, which broke up and sold the entire listed entity at a material premium to the listed price and Currys, which recapitalised its business through the sale of its Greek entity, Kostavolos.
Share buy backs
In a stock market where earnings growth and liquidity are viewed as rare commodities, a share buyback programme can improve both. In 2024, the FTSE 250 Index saw 40% of its constituents purchase over 1% of their share capital back. Not only has this been accretive to earnings but also to the dividend per share of the companies involved. The FTSE 250 prospective dividend yield is currently 3.9% and is forecast to grow by 11% over the next 12 months. Share buy backs will add to this growth.
Moving from the AIM to the full list
For smaller companies looking to fund ambitious growth, a move to the main market has become imperative, in particular given the comparatively lower cost of capital on the main market. Companies we have seen make, or announce an intention to make, this move recently include Alpha Group International, Atalaya Mining, Gamma Communications, GlobalData and Brooks Macdonald.
Activist shareholders
Where company management has been unwilling or unable to make changes for themselves, activist shareholders have stepped in to the breach. Companies where activist shareholders have taken a shareholding include Smith and Nephew (Cevian Capital), Rentokil (Trian Investment Management) and Watches of Switzerland Group (Gatemore Capital Management).
Listed companies being taken over
UK companies have become tempting targets for private equity investors as well as corporates. There is a deep well of private equity money looking for a home, and the arbitrage between UK listed companies and internationally listed businesses makes the deal very appealing. Recent acquisitions include Spirent, Hargreaves Lansdown, Darktrace and Tyman.
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