The Real Lesson From the UK Labour Party's Nationalization Chatter

Editors’ Note: Our political commentary is intentionally non-partisan. We favor no political party, candidate, policy or program. We assess political developments solely for their potential economic and market impact and believe 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 this 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 nationalize the broadband arm of BT Group (the artist formerly known as British Telecom), setting off a national frenzy. Johnson called it a “crazed communist scheme,” which seems a little over the top, 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 about 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 fiber optic broadband rollout. According to The Guardian, only 8% of UK households have full-fiber broadband, compared to 71% in Spain. To “fix” this, a Corbyn government would nationalize 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-fiber broadband by 2030.

Whether this nationalization 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 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 on shareholders, legal action is a foregone conclusion. So we wouldn’t exactly start making portfolio changes based on the risk of nationalization—of this or any UK company. Yes, markets dislike legitimate threats to property rights, but this doesn’t 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—juuuuuuuuuuuuuuuuust a bit lower.^[i] We have seen quite a bit of coverage implying BT shareholders’ entire dividend would be vaporized by the broadband nationalization. This may indeed prove to be the case, but it isn’t 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. If the government were to nationalize it, it would likely resemble a corporate spin-off, not a wholesale nationalization of the entire conglomerate. Revenue-generating businesses would 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 have often made: 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 carved in stone, leaving investors with the conundrum of how to replace a disappearing yield. If you rely on an 8% dividend to meet living expenses, swapping that stock for equivalent government bonds paying less than 1% probably won’t cut it. Even if the company paying the high dividend isn’t at risk of nationalization, it could still cut its payout for any number of reasons. Sales could fall. Costs could rise. Management could decide to pursue buybacks instead. Or reinvest more profits into the business. Or or or.

So we suggest using this story as inspiration to take stock (pun intended) 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 on Friday: 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 stock only works until it doesn’t. The risk extends far beyond a cut dividend or partial nationalization. What if the company fails? Loses significant market share to a competitor? Makes a mistake it can’t recover from? We don’t think folks’ retirements should be jeopardized 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 stocks 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—you will find a far greater opportunity set. When it is time to raise cash, you can sell a few shares. It will feel weird if you haven’t done it before, but lightning won’t strike you.

Beyond this, though, we wouldn’t overreact to this BT nationalization 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 in the UK. If a wave of nationalizations actually becomes a reasonable probability, then there will be time to assess the situation and make more measured portfolio decisions.