Should You Worry About Pension Payments At BT Group plc, AGA Rangemaster Group Plc & Thorntons plc?

Pensioners are pummelling shareholders at BT Group plc (LON:BT.A), AGA Rangemaster Group Plc (LON:AGA) and Thorntons plc (LON:THT). Should you worry?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

BT (LSE: BT-A) (NYSE: BT.US), Aga Rangemaster (LSE: AGA) and Thorntons (LSE: THT) are three FTSE companies with big — and currently rising — pension deficits.

As a result, all three firms are set to hand over more of their annual profits to their pension schemes in order to eliminate the shortfall. How concerned should investors be about these companies’ onerous obligations to their pensioners?

A pension deficit can be found as “retirement benefit obligations” under “non-current liabilities” on a company’s balance sheet. The number represents the difference between the pension scheme’s assets — investments, such as equities, bonds, and property (even maturing whisky in the case of drinks company Diageo!) — and the present value of future retirement benefits that need to be paid.

The table below shows a selection of financial figures for BT, Aga and Thorntons.

  Market cap Operating profit last 12 months Current pension deficit Pension deficit 12 months ago
BT £39bn £3.4bn £7.9bn £7.3bn
Aga £73m £9.6m £72.0m £35.8m
Thorntons £50m £9.3m £36.7m £28.3m

As you can see, Aga’s pension deficit has doubled over the last 12 months, and now represents almost 100% of the company’s market capitalisation, compared with 73% for Thorntons and 20% for BT. Aga’s deficit is also equivalent to 7.5 times the company’s current annual operating profit, compared with 3.9 times for Thorntons and 2.3 times for BT.

Clearly, Aga’s deficit is the most serious, so let’s begin with the upmarket cooker company.

Companies and their pension trustees review the funding of their pension schemes every three years. Aga is currently in the process of doing that. If the existing deficit recovery plan were to remain in place, Aga would pay £4m this year and £10m a year from 2016 to 2021 inclusive, as well as a £30m lump sum contribution at the end of 2020.

With Aga’s annual operating profit currently £9.6m, the business is effectively being run for the benefit of the company’s pensioners. That will continue to be the case for the foreseeable future, even if Aga can grow its annual profits at a faster rate than most other companies. A tangible indicator of the lack of shareholder value here is the absence of a dividend since 2011. The board needs the consent of the pension trustee to pay a dividend, and hasn’t even asked, such is the miserableness of the financial position. In my view, due to Aga’s pension deficit, the company is currently uninvestable.

Thorntons is in the midst of finalising a new deficit recovery schedule with its pension trustee, which will see the annual deficit payment increase from £2.75m to £3.25m. With operating profit running at £9.3m, Thornton’s situation isn’t as dire as Aga’s, but — like Aga — the confectioner hasn’t paid a dividend since 2011.

Thornton’s pension scheme assets contain a relatively high exposure to equities of 65%, versus 28% for BT and 17% for Aga. Less risky assets such as bonds, are seen as more compatible with the nature of pension obligations, and Thornton’s high equity exposure could result in its deficit gaping much wider in the event of a stock market crash.

BT and its pension trustee have just finalised their triennial deficit recovery plan. The numbers involved are much bigger in absolute terms than those of Aga and Thorntons (starting with £2bn over the next three years), and the telecom firm’s extra annual payments also stretch out as far as 2030. However, relative to BT’s own financials, the obligations are less onerous than those faced by the two smaller companies — highlighted by the fact that BT pays a dividend.

Pension deficits have become such a problem of late largely because of low gilt yields, resulting directly from the fiscal policy of Quantitative Easing. Unprecedented low yields have meant unprecedented low discount rates applied to pension schemes projected liabilities. While scheme assets have generally been increasing in value, liabilities have been increasing at an even higher rate.

This situation should reverse when things get back to normal, and is an added reason why I think investors in BT should not be too concerned about the company’s current pension deficit. I also think this factor makes Thorntons investable at the present time — although whether the company’s current business performance merits investment is another matter. The position at Aga, though, is so extreme that, in my view, the stock is currently best avoided.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any shares mentioned. The Motley Fool UK owns shares of Thorntons. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »