Do shareholder perks add up for investors?

November 22, 2013 7:04 pm

Do shareholder perks add up for investors?

By Lucy Warwick-Ching

Twenty years ago, shareholder perks played a major part in persuading investors to buy shares. Discounts of thousands of pounds on new-build properties were commonplace for shareholders in housebuilders, while generous shopping vouchers for retail share owners abounded. Today’s investors, however, often need to spend hundreds, if not thousands, of pounds to accumulate enough shares to qualify for perks attached to shares. The tough economic climate of the past few years has resulted in some companies focusing on other priorities such as dividend payments at the expense of their most generous shareholder offers.“The 1990s marked the peak for these discount and reward schemes as many companies saw some mileage in trying to turn shareholders into customers,” says Gavin Oldham, chief executive at the Share Centre. “Offering perks tends to lead to strong loyalty among customers who are also shareholders.”

Guy Ellison, head of UK equities at Investec Wealth & Investment, agrees. He says that when it comes to investing, familiarity breeds fondness. Recent research carried out by Investec Wealth & Investment found that people were more inclined to buy shares in well-known companies, with many individuals saying they would continue to hold these shares even if they performed poorly. Thirteen per cent of investors interviewed said they held on to shares for the shareholder perks.

Mr Ellison adds that companies use perks to encourage individuals to support them as consumers as well as shareholders – and that they can sometimes be a useful way for a business to offload unused stock or use up spare capacity on services.

One company that has caught investors’ attention is Merlin Entertainments, the theme park operator, which operates sites including Legoland, Alton Towers, Chessington and Madame Tussauds. Its recent flotation included a flurry of perks for private investors such as discount entry to attractions.

“The discounts made Merlin look like an attractive option for investors who had young children or grandchildren,” says Tim May, chief executive of the Wealth Management Association (formerly Apcims). Investors with £1,000 worth of shares can get a 30 per cent discount on a family Merlin annual pass, priced at £356, although there is no guarantee the discount will be permanent.

Not surprisingly, perks are most common among companies selling “lifestyle” goods and services, such as clothes, cars, restaurants and holidays. Sheridan Admans, investment research manager at The Share Centre, likes the perks offered by Marks and Spencer, Mulberry and BT, all of which he says have sound fundamentals and feature on The Share Centre buy list.

A £4.96 share in Marks and Spencer will earn you a booklet of vouchers giving a one-off discount of 10 per cent across a range of shopping, while a £5.62 share inRestaurant Group

gets an investor a discount of 25 per cent at food outlets such as Chiquitos and Frankie & Benny’s. For investors with 20 shares in Mulberry, the designer retailer, (costing around £2,500 at current prices) there is a 20 per cent discount on purchases up to £10,000 in any single year at certain named outlets.

Shareholders with just one share, costing around £10.10, in Young & Co’s Breweryreceive a 50 per cent discount off the price of its hotel rooms.

“Some investors think of perks as a ‘return on their investment’ in a similar way to dividends,” says Mark Till, head of personal investing at Fidelity. “Depending on where you shop, these perks could help you get a higher ‘effective’ return on investment. For example, someone who is a frequent traveller could save themselves money each year by holding shares in Eurotunnel for the discount shuttle tickets. And the same for someone who buys a lot of their clothes from M&S and owns the company’s shares.”

So how do the schemes work? In some cases, investors will be sent a book of vouchers with the annual report, outlining discounts up to a certain value for each year. In other cases, shareholders will be provided with a discount card giving a set reduction on purchases made from company outlets.

For deals such as holidays and travel, investors will need to book via the companies’ shareholder hotline, while housebuyers purchasing a new home are asked to let the developer’s sales negotiator know that they want to claim their discount.

Mr Oldham warns that certain companies will stipulate the minimum number of shares that must be held by a shareholder before any perks are distributed. In some cases the shares must also be held for a certain length of time before the shareholder is entitled to receive benefits. That can mean investors end up holding a large number of shares, possibly for a long period, to pick up a relatively small benefit.

For example, in order to receive a one-off 25 per cent discount voucher in clothes retailer Next, an investor needs to buy 500 shares – currently an outlay of £27,000.

The high entry levels for these perks highlight how disinterested some companies are in using their shareholder perk schemes to attract investors. “The hurdles for receiving perks will only get higher – as share prices continue to rise – and it will be interesting to see which companies lower the barriers to entry for those discounts. Only then will we be able to see who is truly committed to offering their perks,” says Mr Ellison.

Time stipulations can also catch investors out. Some housebuilders insist on a minimum 12-month period of share ownership before discounts become available. Or you may have to hold the share on a particular date before the time you try to use it.

Savings can be less significant than expected, too. Some companies such as Mulberry, stipulate that discounts only apply to full-price items or standard rates, or that you cannot use them in conjunction with any other discount. But you may find you can do better by buying a limited-period special offer of some sort.

And while some investors view perks as a return on capital similar to dividends, most are advised to look beyond the discounts on offer. “People have become more sophisticated in their investment requirements, and they are focusing on real returns in terms of capital and income,” says Mr Oldham.

Paul Taylor, managing director of McCarthy Taylor, supports this view, telling investors not to be swayed by the perks when deciding where to invest. “Over the years many listed companies have offered shareholder perks, many quite attractive if you want a discount on cruise holidays, for example. We have always advised clients to ignore these when looking at buying investments.

“Like all inducements they have to be paid for out of profits and this must impact on dividends, even if only to a small extent. In addition, a company might be a good investment but you might not always want to book your cruises or hotel rooms with them. Best to keep your options open.”

Experts add that there is little sense in buying shares in a company that is inefficiently run or has failed to move with the times, just because you’ll get a book of discount vouchers or a privilege card.

Mr Oldham also recommends weighing up the cost of buying a share, including dealing costs and stamp duty, against any potential perk. Investors should also confirm any perks are still on offer before buying shares as the benefits can change or be withdrawn completely.

——————————————-

Offering perks builds loyalty

Greg Davies, head of behavioural investment philosophy at Barclays, weighs the value of enticements

A good investment portfolio should generate the greatest returns, relative to the risks. But while capital gains and dividends are commonly acknowledged sources of return, shareholder perks offer less traditional benefits to factor into returns calculations. Is it reasonable or rational for investors to consider such perks when making investment decisions?

The theoretical answer is yes: total financial returns matter, regardless of the form these benefits take. For some perks though, returns are difficult to determine. A share in National Grid (about £7.80 before fees) entitles you to enter a ballot to win an all-expenses-paid place on its Shareholder Networking Programme, which includes visits to operational sites and presentations by senior managers. Enticing, no doubt, if that’s your thing, but unlikely to feature prominently in most investors’ returns calculations.

Own a single Bloomsbury share (about £1.70) and you could receive 35 per cent off all books it publishes. Even after transaction costs, you could recoup the total cost with a £50 book order and still own the share and future dividends. However, this doesn’t provide the investor with any incentive to buy more than one share.

What truly matters is the total return on an investor’s entire wealth, rather than on single investments. For smaller portfolios, perks may constitute a meaningful component of overall returns, but the absolute value of perks is limited, and only truly counts as a return if the investor would have bought the item regardless. Paying less for something you wouldn’t have otherwise bought is an increase in expenditure, not a boost to investment returns. It is difficult for anyone but the smallest investor to use perks as a sound financial justification for ownership.

Claiming perks can also cost time and effort, and may require the investor to hold the share certificate personally. Most importantly, these returns are not realised until we use them. Humans have a psychological tendency to bank benefits that will accrue to future actions, failing to include our own forgetfulness, or that these benefits may not be a priority when the time comes.

In the end, the value of perks is more perceived than real: they make the share stand out, and this psychological salience provides an accessible rationale compared to the intangibles of risk and return.

But we also need to realise that, like perks, not all returns are financial. Many investments are made for reasons other than their risk-return characteristics. Hedge funds and art funds may be purchased as much for the perceived social status of owning them as for their purported financial efficiency.

Many investors willingly forego some financial upside for the emotional return of knowing they are investing ethically, or doing something socially useful. With perks, an analogous benefit may include a sense of identification and familiarity. If this gives investors the emotional comfort needed to overcome the barriers to investing at all – rather than remaining uninvested – then the true returns may far exceed any savings from the perks themselves.

And there is always the chance of getting that golden ticket from National Grid.

——————————————-

Nominee accounts

The rise of low-cost brokers may have helped private investors cut their dealing costs, but it has also meant the end of some shareholder benefits.

One of these is the right to be automatically sent an annual report and accounts in the company in which you have invested. In many cases the shareholder perks are distributed with these.

This is because shares held via a nominee account are generally pooled and held in the name of the nominee, which means the company and its registrar no longer have the names of individual shareholders on the register – and that makes the business of perks more complicated.

Some companies will still provide benefits to shareholders who use nominee accounts, but shareholders will have to approach the companies they have invested in to request the offers, or else ask their broker or the nominee company to approach the companies on their behalf.

One way round this problem is to open an account with Crest, the online share registration and settlement service, which allows you to trade shares electronically but remain the registered owner of the shares. However, this may mean you are unable to include these shares in an individual savings account (Isa) as HM Revenue & Customs requires Isa-able shares to be held in a nominee account.

Stocktrade, Charles Stanley Direct, Redmayne Bentley and Royal Bank of Scotland areamong the trading platforms that provide investors with personal membership of Crest. This means your name, rather than the name of your broker, goes on the share register so you retain the right to any shareholder perks.