The Real Lesson From the Labour Party’s Nationalisation Chatter

Editors’ Note: Our political commentary is intentionally non-partisan. We favour no political party, candidate, policy or programme. We assess political developments solely for their potential economic and market impact and think political bias invites investing errors. Additionally, MarketMinder doesn’t recommend individual securities. The below merely represent a broader theme we wish to highlight.

The UK’s general election campaign kicked into high gear last week, and there were some noteworthy events. Parties selected their candidates. The Brexit Party decided not to stand in the 317 constituencies the Conservative Party won in 2017, an apparent attempt to keep from splitting the pro-Brexit vote. Prime Minister Boris Johnson mopped a floor awkwardly and answered a television presenter’s question about what makes him “relatable” by first musing on how many relatives he has, then declaring it “the most difficult psychological question ever.” Oh, and Labour Party leader Jeremy Corbyn pledged to nationalise the broadband arm of BT Group, setting off a national frenzy. Johnson called it a “crazed communist scheme,” which seems a little over the top in our opinion, but hey, this is politics. As always, we aim to stay above the partisan fray, and our interest is more in the potential implications for investors. BT pays an 8% dividend, according to FactSet, and we have seen a lot of chatter in financial news sites we monitor arguing Labour’s plan destroying pensioners’ cash flow if it were to take effect. This also seems a little over the top, as we will explain, but the general discussion also shows why we think it is a mistake to rely on dividends alone for cash flow.

Corbyn’s plan aims to address the UK’s slow fibre optic broadband rollout. According to The Guardian, only 8% of UK households have full-fibre broadband, compared to 71% in Spain. To “fix” this, a Corbyn government would nationalise BT’s broadband operations (and potentially those of its competitors) and use a tax on Tech multinationals to fund a massive infrastructure buildout. Corbyn claims this would give every home and business “free” full-fibre broadband by 2030.

Whether this nationalisation could actually happen is far from clear. First Labour would have to win an outright majority—which polls suggest is highly unlikely, though not impossible—or convince coalition partners to go along with it. On the outside chance they get that far, they would have to determine a purchase price, which would have to be competitive enough for BT’s many foreign shareholders to accept. Those shareholders include Deutsche Telekom, which reportedly owns a 12% stake and will probably drive a hard bargain. So will the many pension funds that own shares, likely undercutting Shadow Chancellor John McDonnell’s declaration that Parliament will dictate the selling price. If the government tries to foist something unpalatable on shareholders, legal action seems like a foregone conclusion. So we wouldn’t avoid UK shares based solely on the risk of nationalisation—of this or any company. Yes, we think markets dislike legitimate threats to property rights, but this doesn’t appear to qualify. Not yet, anyway.

This hasn’t stopped headlines from having a field day. Labour also alluded to compensating BT’s investors with UK gilts, prompting the obvious comparisons between BT’s 8% dividend yield and 10-year gilts’ 0.73% yield—quite a bit lower.^[i] We have seen a lot of coverage implying BT shareholders’ entire dividend would be vaporised by the broadband nationalisation. This may indeed prove to be the case, but we don’t think it is a sure thing at this point. BT’s broadband arm is a standalone business called Openreach. Industry analysts estimate Openreach’s assets at about £13.5 billion, which is a little more than one-third of BT’s total assets.^[ii] If the government were to nationalise it, it would likely resemble a corporate spin-off (in which a company turns a a business unit into a separately owned company and compensates shareholders accordingly, either with cash or shares in the new entity), not a wholesale nationalisation of the entire conglomerate. Revenue-generating businesses would likely remain within the rest of BT, and that would presumably preserve a dividend. It may not be the payment people are used to, but we think it is important to cut through pundits’ hype and examine the facts.

With that said, the general concept behind the handwringing illustrates a point we think is crucial: In our view, investors shouldn’t rely on dividends alone—and certainly not any single company’s—to meet their cash flow needs. This is an extreme example of dividends not being permanent and guaranteed, leaving investors with the conundrum of how to replace a disappearing yield. If you rely on an 8% dividend to meet living expenses, swapping those shares for equivalent fixed interest securities paying less than 1% probably won’t suffice. Even if the company paying the high dividend isn’t at risk of nationalisation, it could still cut its payout for any number of reasons. Sales could fall. Costs could rise. Management could decide to pursue share buybacks instead or reinvest more profits into the business.

So we suggest using this story as inspiration to take stock of your portfolio strategy and assess whether you are vulnerable to a disappearing dividend. Perhaps you are in the same position as some of the BT shareholders profiled in some news coverage last week: a near lifelong shareholder in the company you worked for, and you have built up a huge holding in it. If this is the case, might we humbly suggest diversifying? Holding a huge position in one company only works until it doesn’t. We think the risk extends far beyond a cut dividend or partial nationalisation. What if the company fails? Loses significant market share to a competitor? Makes a mistake it can’t recover from? We don’t think people’s retirements should be jeopardised by the trials and tribulations of any one company.

Beyond that, look at how you are generating cash flow. Are you loaded up on dividend-paying shares and therefore concentrated in areas like Utilities and the Telecom portion of Communication Services? You may be missing better opportunities for long-term growth elsewhere. If you can move past dividends and focus on total return—dividends plus price movements—we think you will find a far greater opportunity set. When it is time to raise cash, you can sell a few shares. It might feel weird if you haven’t done it before, but in our view, there is no need to build a symbolic firewall around your invested principal. Doing so likely limits your flexibility unnecessarily.

Beyond this, though, we wouldn’t overreact to this BT nationalisation chatter. It is a campaign pledge from a party that is a long way from winning an election—not an immediate assault on property rights. If a wave of nationalisations actually becomes a reasonable probability, then we think there will be time to assess the situation and make more measured portfolio decisions.