A question of trust

Judging by the stats, Clarksons is a no-brainer. But to add this company to the Thrifty 30 portfolio I must overcome two massive prejudices of mine. Maybe I'll fail, but I refuse to give in to prejudice without at least contemplating it.

First the stats. Look at this:

Without looking behind the numbers, Clarksons has been a highly profitable business over the last ten years with a strong balance sheet. Statistically it's Nifty, and not that expensive. The earnings yield implied by a price to book value of 1.7 is 16% and the company hasn't given investors any reason to believe business is about to deteriorate markedly.

Clarksons claims to be the world's leading supplier of shipping services, which must make it the world's leading shipbroker. Eighty-two per-cent of its revenues in 2010 came from deals it negotiated to transport cargo or buy and sell ships. The rest was earned from various services, some traditional, like stevedoring (loading and unloading ships), and others more modern. By publishing research, and advising on corporate deals it operates as a small investment bank specialised in shipping.

Its position in the statistical sweet spot and the durability implied by its 150 year history are attractive, but despite its romantic past it remains a financial institution.

I don't trust financial institutions for two reasons (I'm generalising, that's prejudice for you).

The first is complexity. I couldn't make sense of an investment bank's balance sheet, and the fact that so few people can, including some of the people that run these institutions, goes some way to explaining the current financial crisis. Clarksons' investment banking operations are relatively small though, and broking should be a straightforward business. You provide a service, and charge a fee, so maybe there's no need to worry.

The second reason is money. Another lesson of the financial crisis is how skilled the people who ran certain financial institutions were at creating wealth for themselves, at the expense of shareholders and ultimately the taxpayer. Peter Mandelson was intensely relaxed about people getting filthy rich, but the collateral damage caused by financiers getting filthy reach makes his attitude seem a little naive now.

''550,000 is a generous annual salary for a Thrifty 30 executive but Clarksons is probably larger than average, so I won't quibble about chief executive (right) Andi Case's basic pay.

I'm nervous about the ''4.4m bonus he received in 2010 though.

The company explains its bonuses should not encourage excessive risk-taking because basic salaries are sufficient to cover living expenses and the performance measures are robust and objective. They're based on the overall profit of the company, and limited by the remuneration committee to ensure an 'appropriate' split with shareholders.

There was plenty of profit to go around in 2010. Together the executive directors earned bonuses worth about ''6m compared to ''23.5m in net profit for shareholders in 2010 but I question the extent to which the bonus rewards skill. Largely, the profits of a brokerage must depend on how much shipping takes place, which is a factor of the global economy over which executives have no control.

I'd feel more comfortable if the directors were also major shareholders. Case owns the most, 550,000 shares, worth about ''5m. It sounds a lot, but it is only a year's pay. If profits were to decline, would the company scale bonuses down in line with profits? Or would shareholders take most of the pain as the board argues it needs to retain key members?

And here's my other prejudice. I'm not confident there will always be enough profit to go around. Like the commodities the ships Clarksons charters move around the globe, the company has enjoyed a period of booming international trade dependent on European and North American consumption and Chinese production, both of which look fragile.

Generally, I don't put much faith in stories about the economy, or at least I let the numbers and stories about a company trump them, but some economic stories are so big and obvious they're difficult to ignore.

I'm hoping Calum, aka Valuehunteruk, will respond to this blog because he's written about Clarksons favourably. Next I'm going to compare Braemar Shipping Services and see what more I can learn about shipbroking.