Volkswagen - No PR is Bad PR?

So we’ve been hearing about Volkswagen’s emissions scandal for a good few weeks now, but in case you’ve been hiding under a rock since 18th September, Volkswagen have been found to have rigged their emissions testing of their cars by implementing a ‘defeat device’ which alters the car’s performance when it is being tested. Let’s just say this has not gone down well with the Americans, our friends across the pond are big on their environmental impact (which can only be a good thing!), so this news will have impacted VW’s reputation pretty badly. The tests found that the actual emissions from these vehicles are 40 times higher than US regulations. Not exactly ideal when you consider that there are potentially 11 million of the German cars affected. Could be a hefty cost associated to that? Yep. Apparently, Volkswagen are putting aside £4.7 billion to cover the costs of the scandal. £4.7 billion sounds a pretty large amount, especially when you consider the value of VW is ‘only’ about £48 billion. Imagine losing 10% of the business down to a scandal which could so easily have been avoided. Oh, and did I forget to add that there could also potentially be $18 billion in fines from the US also.. I can only praise the new CEO for his courage in taking on that job!

So on one side, VW could be skint soon, they have to do something to sort out the 11 million affected cars that they’ve allowed onto the roads worldwide. Their share prices have also dropped massively (see below), $167.60 on 15th September to a low of $102.00 on 1st October. But on the other hand, who says all press is bad press? Is this scandal something that VW can recover from?

In October the share price has actually risen. Although it’s a relatively small amount and the share price shouldn’t really stay at it’s lowest, that should be more of an immediate response and build back up, as it has done.

This is hardly very ethical practice by an international company who were previously a well-respected company worldwide. Time will tell whether Volkswagen will fully recover from this scandal.

Are Dividends All That Good?

As a shareholder, would you prefer a small dividend or for the company to reinvest that money into a positive NPV project? There are various theories that talk about the importance of dividends to shareholders, but in reality I think I would prefer the knowledge that the business have projects that they can invest into. After all, if they’re not investing, is the company not becoming stagnant? And that’s the last thing you want as a shareholder!

The main corporate aim of a company is to ‘increase shareholder wealth’, generally you’d probably think the best way to do that is to pay out dividends, which is obviously giving money straight to the shareholder - increasing shareholder wealth.. But in the long run, if a company can invest in projects which are going to generate more value for the company, that will surely have more of an impact on the shareholders and increase their wealth more positively in the long run?

It’s basically a question of would you like a small amount of money risk-free now, or would you like the chance to increase that amount of money by having to wait a longer amount of time for it.

Modigliani and Miller (1961) came up with the Dividend Irrelevance Theory, this is basically saying that a dividend payment isn’t the only thing to affect the share price of a company, investing in +NPV projects will increase the value of the company as well. Although, if dividends are never paid out, then what is the point in having shares in the company. So there has to be a mix.

Shareholders benefit when a company invests in +NPV projects as this can lead to higher future dividends, but it also increases the share price of the company so if they were wishing to sell their shares they would have made a nice profit!

Dividends also have an effect on the economy. Andrew Haldane, Bank of England’s Chief Economist has said that companies paying out dividends are slowing down the economy, they are meeting the short-term needs of the shareholder without taking into account the needs of the wider economy. By investing in projects, it means that money is being circulated and generating more value. If companies aren’t investing and are solely paying out dividends, this means that money is just sitting around doing nothing, and certainly not gaining any value..

Overall, I reckon the key is to invest money into new projects. It increases the value of the company, increases shareholder wealth in the long run and gives the economy a good kick!

Do you all agree?

RBS - A Disaster Waiting To Happen

The Royal Bank of Scotland were, at one point, the largest bank in the world in terms of assets. They went from being average, to top, to hitting rock bottom in 2008. So what exactly, I hear you ask, was the issue? Well, it didn’t help that the guy in charge, Sir Fred Goodwin, had the nickname ‘Fred the Shred’, kinda shows the strategy he uses. Big contributions to their downfall were both their capital structure and their investing activities.

Royal Bank of Scotland and Bank of Scotland were two big competitors in a relatively small economy, they needed to expand outside of Scotland if they were to get any further than what they had already achieved. This resulted in them working to attempt to merge with Barclays (like that was ever going to happen..) and in 2000 they ended up agreeing a £21billion to buy Natwest. This was after the Bank of Scotland had bid to takeover Natwest, but RBS ended up getting ahead of the deal and making sure it was theirs!

After this, the shareholders voted to elect the new CEO, this is when Fred the Shred was elected. So now they weren’t only in Scotland, they had American branches, insurance groups, they bought smaller local banks and they even went into China! So after the takeover, RBS had access to all deposit accounts at Natwest and yep, they used them! In the three years after 2001, they spent a massive £30 billion (wouldn’t that be nice!), they were then told they couldn’t buy any more, not a surprise really! This is when another big problem started.. They went into mortgages..

This was a bad time to go into mortgages as there were huge problems with them in the US. RBS started putting together mortgages and selling them on to gain some interest. Not really sure this was a smart idea because what if people can’t pay? Okay, so people couldn’t pay. Problem.

RBS didn’t seem to want to face their issues and kept lying about their debt, thinking they could get away with it. Until they had to be bailed out by the tax payer in 2008. That was a short eight years to allow the bank to hit rock bottom. Nothing seemed to work out. It would be nice to think that lessons have been learned from this instance.

Mainly, stop putting yourself at so much risk. There is no problem with liking a bit of risk to try and gain a bigger return, but for a bank there’s only so much risk you can take when you’re dealing with customers deposits. They should have given themselves a safety net instead of throwing everything into these mortgages which were never really going to work out. They also shouldn’t have lied. If they hadn’t, maybe something could have been done about it sooner, instead of it having to be down to the taxpayer to bail out, which just makes things a little bit awkward.

Do you think things have improved after this disaster and that other banks have learned from RBS’ mistakes?

Fantasy of Insider Trading

Fantasy League is such a big game nowadays, everybody seems to be playing it. Whether it is a league amongst friends, joining a celebrity’s league or competing with work colleagues. Some sites offer cash prizes, some are just for fun, so is there a morally wrong way to play Fantasy League?

Generally, the idea is to pick the players you think will get the best results, the best way to do this is to understand how points will be picked up. In my opinion, there is little point in playing defensively in fantasy team, get on some defenders who score some goals! Get attacking midfielders, not those who will pick up a bunch of yellow cards and be suspended a few games into the season. At least this is the approach I took! I’m now sitting 8th out of 20 in my work league and I’m pretty happy with that. I play more for the pride of winning, some people play merely to win cash. Obviously so much can change in a sports season that it is completely unpredictable to work out the best team in order to put yourself at the top end of the table come the end of the season. I’m still regretting my decision to put Courtois in goal after he hasn’t got me a single point due to injury..

When I say it is completely unpredictable, that is what I thought.. Recent news has come out that there has been a spot of insider trading going on within the industry. News broke that an employee at DraftKings, who had access to confidential information, won $350,000 playing fantasy team. Yes, it was on a different website, but the principle still stands that they have been competing against people who were merely using their own knowledge to build a team they thought had potential. The situation could be compared to insider trading within the stock market and market efficiency.

We could consider that general customers of these fantasy sports websites are experiencing weak-form market efficiency. Their knowledge of the sport is what everybody else knows, they have no confidential information that could give them an advantage. The guys at DraftKings, FanDuel and the like are those in the market with semi-strong efficiency. They know more than the standard player, so they automatically have a competitive advantage. Is this fair to the consumers who are paying money to be in with as equal a chance as all of their competitors?

Although there are limited regulations on this game as theoretically the game can not be calculated perfectly as it does in the end, entirely depend on how each player plays and how different teams do in the league, as well as unexpected factors such as injuries. It is considered unfair for sports professionals to be involved in betting websites as they know more about the industry, they see how different players play, how different teams train and have a more in-depth knowledge than the average customer. A sports professional can spend weeks preparing and learning about their competitions’ plays. So if a sports player is not allowed to take part in betting due to their automatic advantage, why would it be fair for someone who works at these fantasy team companies to be allowed to play the same game? After all, they spend each and every day working on the game and understanding the rules and regulations. They would be able to see ways to compete in the leagues and gain more points than their competitors.

I don’t think this is fair practice, I believe that for those members of staff at these companies, they should not be allowed to play in these games. Fair enough, play in those where there is no money involved. But there should be regulations in place which prevent them from giving a disadvantage to those customers who pay and expect fair odds on their fantasy team gaming. What do you guys think?