18 ★ FINANCIAL TIMES Wednesday 8 April 2020Share the pain, insist investors,
regulators and the media. Many bosses
get that message loud and clear. But
their pay cuts will look like tokenism if
they end up with big profits from
incentive schemes massaged to remove
coronavirus damage.
That is a real possibility, if the global
financial crisis is a guide. Median
earnings of FTSE 100 top executives
rose by two-fifths between the 2007
financial crisis and 2013. One reason
was that incentive schemes were reset
to make them more achievable, often
by rebasing earnings per share targets.
To work, long-term incentive plans
must hold out a realistic possibility of
reward. A scheme that is under water
will not achieve that. But remuneration
committees did not step in to reset
schemes boosted by a rising economic
cycle for which executives could take
little personal credit. Fiddling at this
new time of crisis would underline the
“heads I win, tails you lose” reputation
of executive pay.
Non-executive directors should also
think hard when setting new LTIPs.
These awards — typically dependent on
targets being met over five years — are
a multiple of basic salary converted
into shares. If the post-crash share
price is used, there might be big gains
when the market rebounds.
Some, like Rentokil Initial, have
postponed 2020 LTIP grants.
Rolls-Royce went ahead using a
mid-March share price, but stressed it
could take windfall gains into account
in deciding the final outcome. Another
option is to reduce the size of the grant.
That is appropriate if the share price
fall is more than a quarter and
predated the Covid-19 downturn, say
consultants at Willis Towers Watson.
Groups must show restraint. There
can be no repeat of the mistakes that
led to the former boss of housebuilder
Persimmon taking home £85m. A
switch from LTIPs to simple awards of
restricted stock is overdue. Now thatExecutive pay: beware
pro-managerial massagelarge swaths of businesses are being
propped up by public money, excessive
payouts are less acceptable than ever.Every day, the human tragedy of
coronavirus is accompanied by
corporate woes. Against the trend, one
UK business — plumbing and heating
repairs insurer HomeServe — says it is
prospering. Its update reports that
6,000 staff are working from home.
Plumbers and engineers are fixing
stuff while staying socially distanced.
Businessishealthy, financesarerobust.
Profits in the year to March will be
slightly ahead of forecasts. Good forHomeServe:
the spigot of the BlitzHomeServe. The group sells peace of
mind like all insurers — these days
without the compliance infractions
that once landed it in hot water.
The question is whether the shares
offer reassurance to investors too. A 10
per cent jump suggests that they do.
The price performance has reflected
HomeServe’s growth more than
defensive qualities — 250 per cent gains
over five years before the market fall.
Acquisitions have made the difference,
mostly in the US where sales have
almost tripled since 2014 to £330m.
The valuation had reflected that
success — a peak rating of 30 times
forward earnings. A sharp fall in line
with the rout looks unjustified.
Redundancies and furloughing are
not on the table yet. That reflects
ample liquidity: £125m of cash in thebank, plus unused debt facilities, takes
total reserves to £320m. Net debt as a
ratio of ebitda was 2 times in March,
below the 3 times covenant boundary.
Profits for the year are secure. A
decision on the dividend will be made
in May. Even if earnings deteriorate,
the moderate payout should be safe.
Although rising with profits, the yield
has barely exceeded 3 per cent over the
past five years. The expected payout of
£80m is well covered by free cash flow.
Cuts to capital spending will protect it.
There is another reason for
HomeServe’s upbeat tone: chief
executive Richard Harpin. He founded
the business. Entrepreneurs succeed
because they are optimists. Moreover,
he is a proud former Boy Scout.
The motto of boy scouts is one CEOs
should obey right now: Be prepared.Investor days are a March tradition for
US oil supermajors ExxonMobil and
Chevron. This year’s New York get-
togethers marked a watershed.
Shareholders gathered, just days before
shelter-in-place orders became the US
norm, to hear groups express guarded
optimism about the year ahead.
A month later, after a near-global
economic shutdown and Russia-Saudi
Arabia conflict, both oil groups have
been forced into evasive action to
preserve their sacrosanct dividends.
Yesterday Exxon announced that it
would cut capital expenditure by
roughly a third to $23bn. In late March,
Chevron said that it would cut its own
capital budget a fifth to $16bn. Against
a backdrop of stagnant commodity
prices, the companies are trying to
balance investment, maintenance
spending and returning cash to yield-
hungry shareholders. For now, the
investors are going to win out.
In 2019, while oil prices hovered at
about $50 a barrel, Exxon, for
example, generated just $7bn of free
cash flow after $31bn of capital
expenditures. Dividends and share
buybacks totalled $12bn. Yet, with its A
credit rating and ensured access to
debt markets, such tight wriggle room
was sufficient. Exxon even lifted its
dividend 6 per cent last year.
So far in 2020, Exxon shares are
down nearly 40 per cent. Chevron
stock is off 30 per cent.
But both companies are in the same
boat. Their respective dividend yields
have spiked to 9 per cent for Exxon and
6 per cent for Chevron. The sheer heft
and diversified businesses of oil majors
make them far more resilient than the
independent drillers that have
proliferated in America in the past
decade. Many of those smaller rivals
will now implode.
Exxon and Chevron would be canny
to consolidate, buying up the acreage of
the weaklings at fire sale prices.
If they cannot do so, blame the
straitjackets created by investor
demands for steady dividends and high
credit ratings.ExxonMobil/Chevron:
imprisoned by dividendsSilicon Valley has stepped up to tackle
the coronavirus pandemic in
unexpected ways. Along with vast
donations, the crisis is prompting US
tech giants to reveal that they can, in
fact, do some of the things they once
claimed were impossible. Policing
content and sharing data with officials
has become the norm. The sector will
struggle to revert to old habits when
the pandemic ends.
So far, increased intervention has
been praised. This week, Facebook-
owned messaging service WhatsApp
said it would limit mass message
forwarding to stop falsehoods being
repeated. Twitter has relinquished its
anxiety about free speech and moved
swiftly to take down tweets it believed
were spreading misinformation.
Apple’s App Stores, have removed
non-official coronavirus apps.
The next stage will be more
controversial. Governments in the west
are calling on big tech to help track the
virus. Such ideas are hampered by a
lack of adequate testing and privacy
laws. The tools provided so far are less
precise than the digital tracking carried
out in China and South Korea. Google’s
Covid-19 Community Mobility Report
shows anonymised data from 131
countries to show how busy or quiet
certain areas are. Facebook’s “Data for
Good” platform offers similar tools.
Neither show patterns of movement for
a specific individual. But they could.
If governments push these tech
groups to do more, they may be wary
of spooking users. Both are well
buttressed with cash and user
engagement is high. But digital
advertising, the major source of sales
for both companies, is plummeting. A
survey of advertising buyers by the
Interactive Advertising Bureau
suggested digital budgets could drop by
up to 40 per cent in March and April.
Neither Facebook nor Google have
managed to diversify away from
advertising as quickly as they would
have liked. Jefferies estimates both are
about to end a decade-long streak of
double-digit annual revenue
growth. Combined, they have lost close
to $340bn in market value in just
under two months.
To recover, Facebook and Google will
need to continue their rapacious dataGoogle/Facebook:
fact checkcollection. Revealing the trove of
information they hold now could fuel a
privacy pushback once the pandemic is
over. Tech’s efforts to use its data for
good are praiseworthy. But it could cost
the industry long term.CROSSWORD
No. 16,446 Set by IO
JOTTER PAD
ACROSS
8 Another of those at the Yard,
all there on the ladder (6,9)
10 Soon to be delivered from ring
road flooded by a river (2,5)
11 Sisters in this cabin finally put
overboard! (7)
12 Offensive about final word by
Queen on MP’s disposition (11)
13 Sound views from this digger?
(3)
14 Attending party? Not before
time, staying in (11,4)
16 Dry, this drowned valley, from
the East? (3)
17 Press on after bum steer from
woodworker (4,7)
20 Painting eg Io from rear is one
representation of moon! (7)
21 So-called imitator of human
speech no linguist initially
accepts (7)
22 Boss, not European, going off
on one (5,4,6)
DOWN
1 To go with hallucinogen
ultimately wastes my time (6)
2 Chemists’ fundamental flaw,
as atomic numbers quickly
made clear (3,2,4,6)
3 Promise given by character
pursuing first of spinsters on
shelf (6)4 He’s no doubt who we’re
talking about (1,7,6)
5 Support one current month
breaking into the next (8)
6 Characteristic of saints
portrayed being a little
squiffy? (15)
7 Sort of accoutrement was
successful in war and what
followed broadcast (3-5)
9 £500 and I’ll do it! (6,8)
14 Start work, but not from home
(4,4)
15 Doing parts eventually quite
personal (8)
18 To swap for horse’s head, take
a general (6)
19 Legwear only sported in Nova
Scotia (6)6:25'6 :257+)8/
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x = 55.
y = 50.HIGHHIGHHIGHLOWLOWOCCLUDED FRONT LINE
WARM FRONT LINECOLD FRONT LINEISOBAR BRUSH FRONT SYMBOLSPRESSURE LABELS1040 10401030 103010201020101010101 0001000990 990980 980970 970960 960950 950940 940xxNAMExxMalta Sun 18
Manila Fair 34
Miami Fair 32
Milan Sun 21
Montreal Fair 7
Moscow Drizzle 11
Mumbai Sun 33
Munich Sun 21
Naples Sun 21
New York Cloudy 16
Nice Sun 19
Nicosia Shower 20
Oslo Fair 13
Paris Fair 23
Prague Sun 21
Reykjavik Sun 3
Riga Sun 15
Rio Cloudy 24
Rome Sun 19
San Francisco Cloudy 16
Singapore Fair 33
Stockholm Fair 15
Strasbourg Sun 25
Sydney Shower 19
Tokyo Shower 19
Toronto Fair 15
Vancouver Sun 11
Vienna Sun 21
Warsaw Sun 19
Washington Fair 26
Zagreb Sun 20
Zurich Sun 23Amsterdam Fair 22
Ankara Fair 15
Athens Fair 17
Bahrain Sun 34
Barcelona Fair 18
Beijing Sun 17
Belfast Cloudy 14
Belgrade Sun 20
Berlin Sun 22
Brussels Sun 23
Budapest Sun 20
Cairo Fair 23
Cardiff Fair 19
Chicago Shower 20
Cologne Sun 25
Copenhagen Sun 13
Delhi Sun 33
Doha Sun 37
Dubai Sun 34
Dublin Sun 16
Edinburgh Fair 14
Frankfurt Sun 24
Geneva Sun 21
Hamburg Fair 21
Helsinki Sun 12
Hong Kong Fair 22
Istanbul Fair 13
Lisbon Cloudy 17
London Fair 23
Los Angeles Shower 16
Luxembourg Sun 23
Madrid Fair 22Today’s temperaturesForecasts by
Wind speed
in KPH1648
32111322(^1722)
22
21
21
23
23
23
22
13
12
12
11
19
21
17
21
19
21
23
22
22 19
20
17
(^1520)
20
14
20
Lex on the web
For notes on today’s breaking
stories go towww.ft.com/lex
Twitter:@FTLex
Hoarders in the US need more than
just hand sanitisers and toilet paper
— they want to protect their stash.
Americans have responded to the
coronavirus pandemic by stockpiling
guns and ammunition. Background
checks — a gauge of retail-gun sales —
have hit an all-time high. The FBI
processed more than 3.7m attempts
by individuals to purchase firearms
in March. That is the most for a single
month since records began in 1998.
Doomsday “preppers” talk of the
three B’s: beans, bullets and
Band-Aids. Fear that the pandemic
will spark civil unrest and a law and
order breakdown is providing a boost
to gun manufacturers and sellers.
Whether that will be enough to
tempt investors back is another
matter. Sales slumped after the
election of Donald Trump in 2016 as
consumers stopped worrying about
losing access to guns.
American Outdoor, which makes
Smith & Wesson firearms, produced
net profits of just $18.4m on $638.3m of
sales to April 2019. That is down from
earnings of $128m two years earlier.
Sturm, Ruger & Co and Vista Outdoor
had similar declines. Remington
Outdoor, America’s oldest gunmaker,
filed for bankruptcy in 2018.
Gun sales jumped in 2019 when
presidential hopeful Beto O’Rourke
proposed a mandatory gun buyback
programme. He dropped out and
shares in listed gunmakers have
struggled. American Outdoor, which
announced plans last year to spin off
Smith & Wesson, is down 75 per cent
from its 2016 peak. Ruger has lost
about a third. Vista sold its gun-
manufacturing business, Savage
Arms, last summer, but kept its
bullets business. Its shares are down
more than 84 per cent from the top.
Even so, only Vista has much net
debt (5 times its ebitda). The other
two have reasonably healthy balance
sheets and cash flows.
Gunmakers suffer from an
indelible image problem. Calls for
asset owners — such as US state
pension funds — to divest from these
companies have intensified in recent
years following a rise in mass
shootings.
Panic-buying of firearms will not
rehabilitate them.
FT graphic Sources: Refinitiv, FBO; The Center for Responsible Government; S&P; FBI
Gun sales up, shares down
FBI gun purchase checks, share prices (rebased)
Firearm background checks
( -month rolling average)
Vista Outdoor
Higher expenditure by gun lobby
National Rifle Association annual spend ( m)
Index funds go big on guns
Value of stakes held by three mainly passive
managers ( m)
Ruger
Vista Outdoor
American Outdoor
BlackRock Vanguard State Street
Ruger
American
Outdoor
Coronavirus/US gun industry: of slugs and lettuce
Anxious Americans have been stocking up on guns as well as food. That has given only a modest bump to
the shares of companies involved in gun manufacturing. Gun-control proposals, which pro-firearms lobbying
resists, are in abeyance. Passive managers are big investors in this fraught industry.
APRIL 8 2020 Section:FrontBack Time: 7/4/2020 - 18: 44 User: joe.russ Page Name: 1BACK, Part,Page,Edition: EUR, 18, 1
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