The outcome of the 2019 general election could have a significant impact on the way a number of UK-listed companies do business in their respective markets. This is important in light of the release of Labour’s latest manifesto policy document, which is even more radical than the one published in 2017.
Even the merest possibility that the Labour party might be able to implement some of its manifesto pledges is likely to see investment flows dry up, and a possible capital flight, let alone the paralysis that would ensue as they try to reopen negotiations with the EU. That’s even before we take into consideration the effect the implementation of any or part of their plans would have on small investors, pension funds and the growth prospects of smaller and medium-sized companies.
From a financial transaction tax, to widespread interventions in business and a renationalisation programme, a prospective Labour government could have significant repercussions for listed businesses across the UK, as well as defence contractors, and might result in lawsuits being brought by businesses who could find their assets being appropriated by the government, for less than a fair price.
This is particularly relevant given recent gains in the FTSE 250, where it is starting to head back towards the record highs we saw in 2018, and which has a trailing dividend yield of over 3.5%.
The various sectors that are in Labour’s crosshairs are as follows:
The energy market has already been affected by measures that were passed in the wake of the last election, with the implementation of the price cap on variable tariffs, brought in by the Conservative party, and which gets reviewed on a regular basis.
Labour have said they will take the supply arms of the energy companies back into public ownership to deliver renewable energy, affordability for consumers and democratic control. Labour would also retake control of the energy supply networks and control grids, and ban fracking.
It’s important not to underestimate the impact here given that future infrastructure spending could be affected, which given concerns about how future UK energy is delivered are likely to be significant.
Affected companies include Centrica, with a current dividend yield of 12%, Scottish and Southern Energy, current dividend yield 7%, and National Grid, with a current dividend yield 5.2%.
The Labour party has also pledged to levy a windfall tax on the big oil companies despite recent denials by the shadow chancellor that he was looking at such a plan. The sums of money estimated could be in the region of £11bn. This could have a chilling effect not only on investment, in places like Aberdeen, potentially making the oil and gas sector unviable and seeing jobs disappear, but also exert upwards pressure on fuel prices. Labour also claim to provide a strategy to safeguard jobs and skills that depend on the oil and gas industry.
According to the Labour manifesto, the water industry also requires reform A significant percentage of people struggle to pay their water bill. Despite this, only a fraction of customers have benefited from the social tariffs offered by water companies. The Labour party has pledged to replace the current water system with a new unit for public services within the Department for International Development. Labour will also renationalise bin collections at local council level.
Affected companies: Severn Trent, current dividend yield 4%; Pennon, current dividend yield 4.5%; United Utilities, current dividend yield 4.8%.
Labour will bring private rail companies back into public ownership as the franchises expire. This will still cost a significant amount of money in terms of the purchase of the outstanding rolling stock, as well as increasing staffing costs by ending driver-only operation. There will also be an extension of HS2 into Scotland, building a Crossrail of the north, and a full scale electrification programme across the whole country.
Labour has said it will introduce a new Department for Housing with a pledge to build at least 150,000 new council and social homes per year, with 100,000 of these built by councils for social rent. Labour has also said that it will give leaseholders the right to buy their freehold at a price they can afford, and abolish leasehold properties completely.
Affected companies: Bovis Homes, current dividend yield 5.2%; Crest Nicholson, current dividend yield 9%; Taylor Wimpey, current dividend yield 4.4%; Persimmon, current dividend yield 9.4%; Barratt Developments, current dividend yield 4.4%; and Redrow, current dividend yield 4.7%.
Labour have pledged to stop high-street bank closures, as well as banning ATM charges. They have also pledged to create a publicly-owned Post Bank run through the post office network, as well as bringing Royal Mail back into public ownership. They will extend the existing Stamp Duty Reserve Tax to cover a wider range of assets, including forex and commodity spot and derivatives trades, at 50% of transaction costs. Labour has said it is prepared to act unilaterally in the absence of a global consensus.
Affected companies: HSBC, current dividend yield 6.8%; Lloyds Banking Group, current dividend yield 5.5%; Barclays Bank, current dividend yield 4.1%; RBS, Santander, TSB, Co-operative, Metro and Virgin Money.
The Labour party has pledged to introduce a tobacco control plan, however there are few details on what form it would take.
Affected companies: British American Tobacco, current dividend yield 6.8%; Imperial Brands, current dividend yield 12%.
Labour would reverse the privatisation of Royal Mail at the earliest opportunity. Its current dividend yield is 12.3%.
Labour has pledged to take the OpenReach division of BT Group into public ownership with a view to rolling out full fibre broadband across the country. Labour estimates that this would save £5.1bn on operating costs over a 30-year period, and would cost on average £230m per year over that time (£6.9bn). With operating costs estimated at £579m, this seems rather low when taking into consideration staff costs as well. BT Group’s current dividend yield is 8.4%
In addition to the suspension of arms sales to Saudi Arabia and Israel, Labour will also cease exports to countries where there is concern they will be used to violate international law. The Labour party has said it remains committed to the future of the Trident nuclear deterrent, however given that they have said they would never use it under any circumstances, this is something that could get dropped. Babcock saw its order book swell to over £30bn worth of future work in 2017 on refitting the weapons systems.
Affected companies: BAE Systems, current dividend yield 3.9%; Chemring, current dividend yield 1.72%; Babcock, current dividend yield 5%.
Labour has also committed itself to raising corporation tax rates from the current 17% to up to 26% by 2022/23, as well as forcing companies to give workers a stake in companies they work for, and a share of the profits they create.
All large companies will have to set up ‘inclusive ownership funds’ which will set aside 10% of the company for employees with dividend payments distributed equally to a maximum of £500 per year, with the rest being used to top up the climate apprenticeship fund. They have also said they would look at exploring a pilot of universal basic income, while also pledging to spend another £58bn on funding a shortfall on women's pensions.
UK business could find itself in the firing line quite quickly if opinion polls start to point to the prospect of any sort of Labour administration in this election. For now, the current state of the polls suggests that Labour has little hope of implementing any of its manifesto, however the polls only need to give an indication of moving towards the prospect of a less-than-decisive Conservative victory, for investors to become nervous about what might be coming their way, in the form of more Brexit delays or even a minority Labour administration, and the prospect of higher taxes and spending.