Schroders stock slumps as tide turns against tax inversion deals

Schroders was back in the UK stock market spotlight on Friday (8th August), albeit not for the right reasons. It was the worst-performing stock for most of the day.

It appears the FTSE 100-listed asset manager bore the brunt of a sell-off afflicting all major stock markets.

Global markets and the US dollar continued the weakness they began to show on Thursday, whilst oil and gold prices advance in reaction to President Barack Obama’s authorisation of targeted air strikes in Iraq.

Fighting also continued in Gaza between Palestinian militants and Israeli forces. Plus, NATO called for Russia to “step back from the brink” of war in Ukraine.

But there was one more important factor to remember for Schroders, helping to explain the marked selling of its stock today.
Schroders is amongst the biggest shareholders in a number of firms implicated in the US administration’s drive against tax “inversion” deals.

So-called “inversion” takeover deals are intended to enable the group making the acquisition—up until now, almost exclusively US-domiciled companies—to reap taxation benefits by picking up an asset based in a region with a more favourable tax regime.

Influential US Senator Carl Levin on Thursday joined a rising chorus of US officials who voiced disapproval of such deals recently. The President himself has accused companies engaging in such agreements of “renouncing their citizenship”.

Well, Schroders, with BlackRock, the US-based investment management group, is amongst the biggest shareholders in the UK firm at the centre of the most infamous attempt at an “inversion” deal: AstraZeneca.

Schroders had 2% of Astra, whilst the largest shareholder, according to data from May 2014, was BlackRock with 8%.

In May the UK pharmaceutical giant rejected an improved “final” takeover offer from Pfizer. Pfizer wanted to create the world’s largest drug company, with its headquarters in New York, but based in the UK. Pfizer aimed to pay the UK corporate tax rate of 20%, rather than the 35% rate applied in the US.

With Astra’s rejection, UK takeover regulations prevent Pfizer from returning to make a further public offer- something which seems all but inevitable – until November.

However, the rules do permit Pfizer to make a fresh bid in private as early as August 26 – three months after a “final” £55 a share offer was rejected by AstraZeneca.

Speculators continued to bid up Astra’s stock even after it rejected Pfizer’s last offer

Now, with the US government stressing its opposition to US companies effectively seeking overseas deals to shelter from taxation at home, prospects of a buy-out of Astra by Pfizer look more complicated.

That weighs on shareholders like Schroder.

Granted, Schroders’ second-half earnings at the end of July were not particularly impressive. The fund manager posted first-half revenue that lagged expectations, sending its shares lower even as assets under management hit a record high.

Even so, the underlying picture and outlook showed some bright spots. Pre-tax profit rose 6% to £233.9m, even after an £18m hit from the strength of sterling. The company said it would pay an interim dividend of 24p, up 50%.

“We have a very strong pipeline of business we’ve won in institutional, by far the highest we’ve ever had, but which has not yet been funded,” Chief executive Michael Dobson said.

The outlook at least appeared to warrant further reflection by investors before withdrawing any support.

Drilling into Schroders’ financial innards we can see its earnings per share have an implied compound annual growth rate (CAGR) of 36.6% over the past five years.

It’s way ahead of the peer median at 7.3%. As for forecasts for the next five years, the market implies a cautious EPS growth rate of 5.5%, compared to investment banking and investment services sector average of 2%.

The overall picture equates to one that covers many UK-focused global financial groups: operationally and financially in great condition, but prone to a strengthening pound and to any geopolitical forces afflicting the market. The group is very much a bet on its capability in finessing such factors whilst keeping operationally firm.

With Schroders’ stock hitting 2014 lows right now the stock’s trajectory seems inordinately sensitive to any improvements in the geopolitical picture, although these probably won’t come in the immediate term.

Therefore, in the event of continued falls by Schroders stock, 2036p seems to be a medium-term downside target. The level is the foot of a major down leg touched in the second quarter of 2013. That slippage commenced in mid-May around 2572.51p.

On the upside, apart from today’s high at 2269p, the stock probably needs to get past 2320p (last visited on 5th August) to signal further medium-term gains.