Privatisation shares up 419% since 1980s

Investors who bought into a range of popular privatisations in the 1980s and held their shares for the long term have achieved double the returns of the UK stock market, according to research by Brewin Dolphin, the investment manager.

Investments in nine of the government sell-offs of the Thatcher era have made profits averaging 419 per cent, the manager has calculated. This compares with the 206 per cent average rise in the FTSE 100 index since the flotations.

The research comes as the weakness of the public finances could prompt further privatisations after the election, and follows the Conservatives’ recent proposal to sell discounted shares in the taxpayer-backed banks to private investors.

Brewin Dolphin says the “tremendous growth” achieved from past sell-offs suggests “investors will be looking forward to another round of privatisations as the next government tries to fill its black hole”.

Its analysis assumed equal investments in the flotations of British Gas (famous for its “Tell Sid” ad campaign); BP; British Airways; BT’s first 130p share issue in 1984; BAA; BAE Systems; Powergen; National Power and Severn Trent Water – which, collectively, attracted more than 5m private investors.

Individuals who sold their shares straight away – so-called “stags” – could have made substantial profits of up to 80 per cent in some cases, but those who kept their holdings have also benefited from market-beating returns overall.

Small-investor “Sids” who backed the record multi-billion pound privatisation of British Gas in1986 have clocked up the biggest capital returns of 1,048 per cent, according to Brewin Dolphin’s analysis.

British Gas subsequently split into Centrica and BG, and investors also received National Grid shares in the takeover of BG’s Lattice spin-off. The returns calculated by Brewin Dolphin take account of these changes as well as the cash value of other corporate events.

BP, Severn Trent Water and National Power (now International Power) have also outperformed the FTSE 100 by a good margin, says the manager, although BT (with returns of 202 per cent for investors who backed the 1984 float) and BA (111 per cent) have underperformed.

The comparisons do not include dividends, which would boost the relative performance of the privatisation stocks. The utility and the defensive bias of privatisation shares mean they have tended to pay above-average yields.

Brewin Dolphin says the strong overall returns in part reflect the knockdown flotation prices of many of the 1980s sell-offs.

“Privatisations were deeply discounted and when the companies were exposed to the full force of competition, they certainly improved their performance,” it says. “The stocks were typically also defensive utilities and less prone to market fluctuations – hence their outperformance of the FTSE.”

However, Elaine Coverley, head of equity research at Brewin Dolphin, says the variation in returns in later years shows the risk of holding on regardless.

BT shares soared above 1,500p in the boom of the late 1990s, but subsequently crashed. While investors received £2 per share from the 2006 sale of O2, its mobile phone spin-off, to Telefónica, BT now trades below its flotation price at 123.3p.

In contrast, many of the privatised water and electricity companies were subsequently taken over for cash at good premiums.

Shares in Railtrack, which was privatised in 1996, also climbed more than 350 per cent in the years immediately after its flotation. But the infrastructure stock then plunged amid mounting operational problems, and it was renationalised in 2001.

Railtrack’s 250,000 investors have since received compensation payments totalling 260.5p per share, with a final payment of 2p per share due this month.

But in spite of the disappointments, Eric Chalker, director of the UK Shareholders’ Association (UKSA) said the “strikingly good” overall performance of 1980s’ privatisation stocks “demonstrates once again the merit of investing and holding through the downs as well as the ups”.

Economists estimate that past privatisations raised a total of around £50bn for the public coffers, at a time when the UK economy was a fraction of its current size. The problem for a future government, says Coverley, is that while it needs to raise money, “it hasn’t got a lot left to flog”.

Shadow chancellor George Osborne last month suggested selling the government’s £70bn stake in Royal Bank of Scotland and Lloyds Banking Group in the form of discounted shares.

However, the idea has been criticised for not seeking to maximise returns for taxpayers as a whole.

Justin Urquhart Stewart, of Seven Investment Management, suggests it could make sense for future privatisations to be pooled in a government fund that would offer diversification.