Share this story
Close X
Switch to Desktop Site

Goodbye British Airways

(Read article summary)

Toby Melville / Reuters / File

(Read caption) A British Airways jumbo jet taxis at Heathrow Airport in London. Even though shares of the company sell for more than double what they did when the company launched, they are actually worth less because of inflation.

About these ads

It was launched on 11 February 1987 at a price of 125p and trading closed last week for the last time with shares at around 293p. So, was British Airways a good investment?

Hardly! Since 1987 we have had 116 per cent inflation. This means that 125p in 1987 is the equivalent of 270p today; or, to put it another way, yesterday’s share price of 293p was worth less than 136p in 1987. So a near quarter of a century would have yielded a real return on your investment of just 8.5 per cent.

By comparison, had one forgotten that one had the money and left it in a current account paying a nugatory interest rate of 0.35%, one would have done just as well.

Actually, that is a little unfair. It ignores the dividends that BA has paid out over 24 years. And it also ignores the fact that most people did not sit on their shares for a quarter of a century. Those who sold on 16 May 1997, when the shares hit 760p, did rather well. Had they instead hung on for another six years, they might have sold at a sorry 86p on 12 March 2003.

Economic theory suggests that shares should be fairly stable in value as long as a company’s profits are also stable. The share price should be based on the discounted value of projected future profits, so if a firm makes exactly the same profit every year (in proportion to the capital invested) then the share price should remain the same. BA’s share price fluctuated as its profits did: the peak came after pre-tax profits reached £640m, while the trough followed the slump in profits to £135m.

But the general trend of share prices defies simple economic theory. On average, share prices have trebled over the past quarter century – that is to say, the FTSE 100 has risen from around 2000 to around 6000, almost twice as fast as inflation. Had profits risen substantially over that period (relative to investment) then this would explain the change, but the rise in profits has not been enough to explain the different.


Page:   1   |   2

Follow Stories Like This
Get the Monitor stories you care about delivered to your inbox.