Still worthwhile?

[dchester]

In summary: unless businesses are able to make a fair profit margin, and aren't tied-up with red tape, then eventually there will be very few businesses left in Britain.

Wow I have stepped on a hornets nest! I like to make a fair profit margin myself but we are talking essential utilities here who are pandering to the shareholders and NOT their customers. Private business delivers the best service they can to their customers or they will not last 5 minutes. Utility companies don't have to do this. They can run rough-shod over all of us and I am staggered that some people in here appear to like that!

Perhaps you'd like to see even more tight regulation, with the result that more of our utility companies see their share prices slide to the point where Chinese, Canadian or French businesses pick up our companies for pennies in the Pound? United Utilities and Severn Trent had to cut their dividend payout to shareholders by 11% a few yeara ago after OFWAT come down hard on them. The dividends have yet to recover and now both are subject to buyout speculation from Canadian pension funds. We've already lost, to overseas owners: Thames Water, Northumbrian Water, Scottish Power to name just a few.
Businesses (and people) with money to invest are needed to provide jobs for the majority.

This has turned into a lively debate and I can't help thinking that half of the people here are employed by the utility companies!

This is the problem caused by successive governments. In my opinion, foreign busnesses should not be allowed to buy our utility companies or any part of the infrastructure of the UK.

 

[FB.]

-
Here is an extract from Centrica's half-year results announcement, from June 2012:

INVESTING FOR GROWTH

• Total investment of £1.5 billion in the first six months of 2012
• Further progress in gas development projects, to bring 140mmboe of reserves into production
• Moving ahead with £1.4 billion Cygnus development; largest gas discovery in the Southern North Sea for 25 years, supporting 4,000 new jobs
• First power from £1 billion Lincs wind farm in the coming weeks, able to supply around 200,000 homes
• Awarded planning consent for 580MW Race Bank wind farm; progressing towards a final investment decision in the first quarter of 2013

Here's an extract from SSE's (Scot & Sthn Electric) from July 2012:

· Networks: SSE's subsidiary Scottish Hydro Electric Transmission Ltd (SHETL) has undertaken capital works totalling £80m, including completing the new £25m 275kV substation at Beauly, and remains on course to achieve a Regulated Asset Value of over £1bn for the first time later this year;
· Wholesale: SSE's onshore wind farm capacity in operation has increased by 50MW to 1,353MW as a result of progress at the Clyde wind farm development;
· Wholesale: SSE's commissioned offshore wind farm capacity (net) has increased by 69MW to 256MW as a result of the completion of Walney and ongoing construction progress at Greater Gabbard, where 137 of the 140 turbines have now generated electricity; and
· Wholesale: The seventh of the nine caverns at the new Aldbrough gas storage facility being developed by SSE and Statoil UK Ltd have been brought into commercial operation in June and dewatering of the eighth was also completed in June, keeping the development on track to achieve full operation later this summer. Meanwhile, the facility continues to operate with high availability to meet commercial requirements.

In addition, the reservoir at the 100MW Glendoe hydro electric scheme is now being filled, in advance of electricity generation which is expected to resume shortly.

Other developments
Since the publication of its full-year results on 16 May 2012, SSE has also entered into an agreement with Endesa Generacion SA to acquire electricity generation assets in Ireland which are in operation (1,068MW), under construction (460MW) or in development for a total cash consideration of €320m (£256m) plus an estimated €43m (£34m) for working capital and €125m (£100m) to complete the construction of the Great Island CCGT.

 

[FB.]

I like to make a fair profit margin myself but we are talking essential utilities here

But where do we draw the line for "essential", without risking state-owned-everything and communism as a result?

Cars are essential.
Petrol is essential.
Food is essential.
Postal services are essential.
Telecoms services are essential.
Clothing is essential.
Household items - "white goods" are essential.

A case can be made that almost everything is essential.

Unilever (household cleaning chemicals and food producer) reported a 13% margin recently.
BT reported 13% margin.
Diageo (Guinness and alcohol) reported a 21% margin.
British American Tobacco reported a 32% margin.
Barclays reported 18% margin.
Shell reported a 12% margin.
Marks & Spencer reported a 7% margin.
"struggling" Tesco reported 6% margin (same margin as Centrica / British Gas)

Why would I (or anyone else) want to invest in low-margin businesses such as utilities, at the top of consumer's hit-lists, when many other companies - especailly smokes and booze - absolutely rake it in and rob people blind without them realising it?

 

[dchester]

Did you notice that everything you said related to shareholders and none of it to consumers?

 

[FB.]

Did you notice that everything you said related to shareholders and none of it to consumers?

Yes, because there has been too much emphasis on consumers and not enough on encouraging businesses to invest and create jobs.
The economy will not get out of its slump unless businesses can be encouraged to invest, and they will not invest unless the profit margins are satisfactory.

How many construction workers would be given jobs, if the utility companies suddenly were able to find profitable investment options for new power stations? How much extra would that inject into the ailing UK construction industry - and filter down as wages to ordinary people? Or should we continue to lack investment and buy all our power from the Continent, with money flowing overseas instead of the UK?


I presume, then, that you'd like everything to be owned by the state - including your business. After all: almost everything is "essential" and therefore why should one industry or sector be any different to other industries or sectors (especially if margins are already very low)?

As things stand, you can see where investors and businesses will put their money - smokes, booze and anything with a government subsidy. Not many will be interested in low-margin utilities and investment in utility infrastructure may be starved as a result.

 

[FB.]

And put things into perspective:

What proportion of people's money goes on:

Gas & electricity
Telecommunications
Food
Clothing
Council tax
Petrol
smokes
Booze

?

So much anger directed at gas/electric companies, when people spend more on food, or spend as much on petrol, or as much on communications/telecoms, or as much on smokes, booze or holidays.

The amount of anger directed at one minority portion of monthly outgoings is disproportional to its significance. While everyone continues to have all eyes on just one obsession, they will continue to be robbed by all the other industries which provide "essential" services.

 

[Vegelen]

There appears to be a price fixing cartel operating here and customers are being ripped off.
There is no competition or we would see energy companies trying to reduce costs and prices in order to capture more customers.
Instead of this we see across the board price hikes far greater than inflation and convoluted, confusing price plans.
That's not OK with me when this is an essential utility.
There is clearly no proper regulation on the side of the consumer.

Well said.

If anyone attempts to say energy companies make money and are profitable, the old chestnuts are brought out.

"Low Profit margins of 5%, little return on shareholder capital, high risk, yada, yada, yada".

The energy business generates lots of money, problem is too many benefactors (shareholders) exist drawing off these returns".

If the energy business didn't make money national governments wouldn't show such an avid interest in it.

Lots of money is wasted in this business IMHO.

Centrica generates vast profits generating electricity from gas.

 

[Vegelen]

Why would I (or anyone else) want to invest in low-margin businesses such as utilities, at the top of consumer's hit-lists, when many other companies - especailly smokes and booze - absolutely rake it in and rob people blind without them realising it?

So why do you then?

Operate in the free market, sell your over priced shares, stop defending energy

companies and go invest in all these better alternative economic investments.

You sound more emotional about Utility companies than a standard investor.

You have made a water tight argument, why it is not sensible to invest in energy

companies for the foreseeable future.

 

[Vegelen]

Yes, because there has been too much emphasis on consumers and not enough on encouraging businesses to invest and create jobs.
The economy will not get out of its slump unless businesses can be encouraged to invest, and they will not invest unless the profit margins are satisfactory.

If 0.5% Bank Of England base rate isn't the correct environment for businesses to borrow

and invest money, i'll go shoot myself.

I'd agree that the government could do more to help encourage businesses to invest in the

UK, but to say there has been too much emphasis on consumers in the UK is absolute

rubbish.

 

[FB.]

So why do you then?

Operate in the free market, sell your over priced shares, stop defending energy companies and go invest in all these

better alternative economic investments.

You sound more attatched to the Utility companies than you claim.

You have made a water tight argument, why it is not sensible to invest in energy

companies for the foreseeable future.

I sypathise with utility companies and what I see as over-harsh regulation. I do own some shares in them but they are among my smaller holdings. Remember that I have to pay bills too, but I have a greater sense of economic balance and a fair profit for all businesses. But strip the utilities of all their profits and you'll only see bills drop by 6% - and you'll then see even less investment than there is now. Would a 6% drop in gas/electric bills - several quid a month - save the UK's poor?

Well-known companies among my largest holdings are Vodafone (21% margin) and AstraZeneca (37% margin), although I hold certain shares for reasons other than purely the profit margin. For example a big holding in Sainsbury (bought below £3 in late-2011 and early-2012) because the shares have been so cheap that they trade for less than the value of the buildings, so are begging to be snapped-up by a predator wanting to break the company up and flog-off the bits - of which the Qatari Delta-Two fund (who already have acquired one-quarter of Sainsbury's shares) is rumoured to be in talks to buy the Sainsbury family's holdings in preparation for a £5-a-share buyout (current price around £3.50).

 

[FB.]

If 0.5% Bank Of England base rate isn't the correct environment for businesses to borrow

and invest money, i'll go shoot myself.

I'd agree that the government could do more to help encourage businesses to invest in the

UK, but to say there has been too much emphasis on consumers in the UK is absolute

rubbish.

Why invest when there is such regulatory and political risk? Or the risk of consumers demanding unrealistically low prices?
Like I said: prices can't go more than several percent lower - a fiver a month on an average bill.

If you want to spend your life arguing over a maximum saving of a fiver a month through "not-for-profit" gas/electric, then fine. But I'd spend my time wondering about other, easier ways to make ends meet.
One less packet of smokes a month, or two less beers, or one less shot at the lottery each week.

 

[Vegelen]

I accept some of the points made.
What irks me is that consumers keep paying, more and more and more in a virtuos circle, on a commodity that isn't particularly special, which no one supposedly profits from?
It reminds me of "See no evil, hear no evil".
Prices rise, everyone pays more and we are led to believe no one benefits.....

 

[FB.]

Prices rise, everyone pays more and we are led to believe no one benefits.....

Known as Quantitative Easing nowadays; it used to be called "Devaluation".

The more money that enters the system, the less the remaining money is worth. Gold and property have value because they are in relatively fixed supply. Money can just be created digitally, or a bit of ink slapped on a piece of paper; Voila! £20 from a bit of paper and ink!
Unlike old money which was gold, or gold-backed.

The "price" of things does not rise; it is the value of money which declines, due to governments being unable to raise more tax, and unable to cut benefits. So they print the shortfall and instead of taking our money, our money buys less (which is the same effect in a stealthy way).

 

[Vegelen]

But I'd spend my time wondering about other, easier ways to make ends meet.
One less packet of smokes a month, or two less beers, or one less shot at the lottery each week.

Lots of people in society are poor and don't waste money on smokes, booze and gambling.

Where do they run to, when they have to make choices between heating their homes and feeding their families?

 

[dchester]

Lots of people in society are poor and don't waste money on smokes, booze and gambling.

Where do they run to, when they have to make choices between heating their homes and feeding their families?

People who have never struggled with this real life scenario will never understand that point, sadly.

Unfortunately those kind of people have been running the country for a generation now. Career politicians. Without an understanding of how real people struggle to pay the bills each month there is not much hope for this country under ANY political party.

I am fortunate, or perhaps unfortunate, to have seen both sides of the coin during my life so I can see both points of view.