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“The FTSE 100 falls 0.3% to 6,728 as poor results from Royal Dutch Shell and worries about Lloyds Banking pull down the market,” says AJ Bell Investment Director Russ Mould.
“Lloyds Banking fell by 4% in early trading after it warned of a ‘deceleration of growth’ and said it couldn’t give clear guidance on future earnings expectations. The market is spooked by a warning that capital generation could be ‘somewhat lower’ in future years than previously guided. That could put a question mark over future dividend growth which is ultimately the key concern for investors. There are a considerable number of people in the UK who have held on to their Lloyds shares in hope that they will once again get the 7% or 8% income from dividends each year, just like they did before the 2008 financial crisis. Clinging on to hope is never a good strategy when it comes to investing. The fundamentals suggest the business could go through a rocky patch.
“Sky has a customer loyalty problem on its hands. Its UK and Ireland churn rate reached 11.2% in the year to 30 June 2016, representing the amount of customers who stopped subscribing to its services. The broadcaster has historically tried to keep the level below 10% but clearly its recent decision to put up TV prices and limit retention discounts hasn’t gone down well. Netflix, Amazon and BT are now serious competitors to Sky for film and sport and have cheaper pricing points, so Sky’s monopoly on premium content is arguably coming to an end.
“Royal Dutch Shell followed BP with results below expectations. There was a small miss on the production side but the big worry is a $5.25 billion rise in net debt to $75.1 billion during the second quarter despite big efforts to cut capital expenditure. Net debt has almost gone up threefold in the past year. The company is clearly under pressure to find greater cost synergies from the BG acquisition and more projects are being postponed. Today’s results will only fuel the argument that it must cut the dividend to save some money and strengthen the balance sheet.”
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