HSBC AGM

[Dod101]

AS I said in the now locked thread 'What a difference 2 weeks make' , I attended the AGM of HSBC on Friday. The first thing to say is that like most AGMs of big companies these days, the important Q and A session was hijacked by ShareAction and its associates with the result that about 2/3rds of the questions were about what ShareAction and its associates regard as questionable activities, such as coal fired power stations in third world countries, selling arms to Israel and other such stuff, none of which has much bearing on the actual running of the company. The articulate, mostly young ladies, representatives read from a prepared script and probably vote for Mr Corbyn.

I was impressed by the new Chairman Mark Tucker and indeed John Flint, the new CEO. They handled these questions with firmness and tact I thought.

However on matters relevant to us on this forum I did not get the opportunity to ask any public question but cornered the Finance Director later on when the Directors circulated amongst shareholders after the meeting. They seem very firm that they will not increase the dividend for at least 2018 or 2019. I find that disappointing but they reasonably point out that dividend distributions still exceed post tax profits.

I then asked about the share buybacks and that many shareholders might prefer a special dividend to a share buyback using surplus capital. They told me that share buybacks are designed to reduce the number of shares in issue, not to distribute surplus capital because, bizarrely they offer a scrip dividend and a large number of shareholders take that up. This demand is satisfied by issuing new shares because if I understood him correctly the HK authorities will not allow a DRIP mechanism, so they then buy back more or less an equivalent number of shares just issued to keep the number down. This can be seen in the Parent Company Balance Sheet in the Annual Report. Apart from the costs involved, they also paid well over £7 per share for the second tranche of the programme which I do not think was a good use of their resources. All in all I thought that was odd and I am not convinced about this aspect. I will take it up with them in writing and will report back. This is a conservative and I think well managed bank and I imagine could do a Unilever if under threat because they admit they are very well capitalised. This probably means that they are sitting on surplus resources, but I am in no position to judge.

In summary I cannot see much movement in the share price until the dividend is increased again but for the time being it is a dependable cash cow.

Dod

[Gengulphus]

I then asked about the share buybacks and that many shareholders might prefer a special dividend to a share buyback using surplus capital. They told me that share buybacks are designed to reduce the number of shares in issue, not to distribute surplus capital because, bizarrely they offer a scrip dividend and a large number of shareholders take that up. This demand is satisfied by issuing new shares because if I understood him correctly the HK authorities will not allow a DRIP mechanism, so they then buy back more or less an equivalent number of shares just issued to keep the number down. ...

I've no idea whether that excuse about the Hong Kong authorities not allowing DRIPs is true. It seems a bit bizarre for them not to allow companies to offer DRIPs, but to allow companies to both buy back shares and offer scrip dividends, as the combination of share buybacks and scrip dividends produces more-or-less the same effect as a DRIP if the quantity of shares bought back matches the number issued under the scrip dividend programme - the only real difference is a bit more risk due to share price fluctuations of the share buyback prices from the scrip dividend price. But then, governments' records of avoiding bizarre rules and combinations of rules are not wonderful, so that bizarreness certainly doesn't prevent it being true!

And in any case, even if the Hong Kong authorities don't allow DRIPs, so that HSBC itself can't offer a DRIP, they can hardly prevent brokers who aren't resident in Hong Kong offering them, nor does it seem likely that they can prevent individual shareholders (even those resident in Hong Kong) using their dividends to buy more shares of the company that produce them or (if their dividends are too small for cost-effective reinvestment) investing via a fund that can reinvest its dividends cost-effectively.

So if the excuse is true, I think it would be better for the company to say "We don't need more capital, so we are ceasing to offer the scrip dividend scheme, and sorry, while we would like to offer a DRIP, we're not allowed to. So if shareholders want to reinvest their dividends in the company's shares, we can only suggest they make their own arrangements to do so." and shed both the costs (associated with each of the scrip dividend scheme and the share buybacks individually) and the share price risk (associated with the combination).

Gengulphus

[Dod101]

Very many thanks Dod, it is great to get a first hand report from the AGM. I am pleased to hear they are holding perhaps a little excess capital, that is reassuring. I would rather they trimmed the dividend to match profits, but appreciate this is a supertanker and actually putting a figure on the profits is not easy accounting, let alone achieving agreement for a dividend cut. Let's hope they build some cover and keep lending ultraconservative. I have been hearing bad things about Chinese debt, so would like to know what their potential exposure might be.

I have been a customer of HSBC for 50 years both in Hong Kong and then the UK and a shareholder since 1991 so can claim to know it fairly well. They are very conservative and have always had surplus capital, and indeed are self funded, lending only about 80% or so of their customer deposits. (Somewhere within the 270 pages of their Annual Report it will tell us) I think we can trust them on Chinese debt but big exposure to Far Eastern markets is one reason why they are so conservative.

Dod