The Investment Column: Lloyds chief shows he's no Scrooge

Aggregate can be a modest growth stock - Tough market conditions put squeeze on Eckoh
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The Independent Online

If you have a little cash to invest, you could deposit it with Lloyds TSB, and get an interest rate of around 5 per cent. Or you could buy some Lloyds TSB shares, and pocket a dividend of almost 8 per cent.

If you have a little cash to invest, you could deposit it with Lloyds TSB, and get an interest rate of around 5 per cent. Or you could buy some Lloyds TSB shares, and pocket a dividend of almost 8 per cent.

That dividend is the best in the banking sector. At the height of worries over the solvency of the life insurance industry, where the Lloyds TSB subsidiary Scottish Widows is a significant player, the pay-out had looked like it might not be sustainable. But that fear has subsided somewhat as equity markets have recovered: the pressure on Scottish Widows has eased to such an extent that it will pay cash back to the parent company this year. Additionally, Eric Daniels, Lloyds' chief executive, has shown himself willing to raise capital from the disposal of international operations rather than by playing Scrooge with the divi.

The pressure to find extra capital to fund customer growth ought to ease from now in any case, since the slowing housing market will almost certainly mean fewer mortgages being written. That will free up cash to support the recovery of Scottish Widows, which ought to benefit from the UK consumer's need to start saving again and from reforms of the way life insurance products can be sold.

The dividend is certainly the main attraction of Lloyds shares, and some would say it is the only one. As a former head of the core UK retail bank, Mr Daniels has decided to focus his efforts on generating growth from that part of the business, but he faces an uphill battle. Lloyds is not alone in trying to flog more financial products to its customers, and with lending growth constrained, competition will surely hurt profitability. The same is true in business banking, where Lloyds has traditionally been weak.

Yet the company's trading update was bullish, showing that it can absorb a new £110m provision for endowment policy mis-selling and still hit the City's profit forecasts. Costs are well under control and provisions for debt defaults are still benign. Buy.

Aggregate can be a modest growth stock

Aggregate Industries, the quarries group which supplies more than 80 million tonnes of stone, asphalt and other building materials to the construction industry every year, is among the companies anxiously watching the sterling-dollar exchange rate. With the US currency sliding, UK shareholders are missing out on many of the benefits of AI's recent strategy of acquisitions in North America.

A trading update yesterday confirmed many of the trends of the year: a favourable performance from the US operations, and a "resilient" one from the UK, which still accounts for a little over half of the group. In the UK, the wet summer hit construction work, but with AI's Midlands operations improving after the end of some big building projects in previous years, sales overall will be up. In the US it is a mixed picture, with some regions benefiting from homeland security work, others from recovering housing markets, but others still suffering from competition and where it has consequently been difficult to pass higher fuel costs on to customers.

Some analysts thought that uncertainty over the dollar, now $1.92 to the pound compared with $1.75 a year ago, was the reason for AI's taciturn outlook statement. While 2004 will be "another solid year" for the group (which has seven years of best-ever profits under its belt) there is little mention of expectations for 2005. The market took that as a signal to be cautious and the stock was off 0.25p at 97.5p.

That level, with a dividend of just over 3 per cent, represents an appropriate price for a modest long-term growth story.

Tough market conditions put squeeze on Eckoh

Five years on from the burst of dot.com mania that launched 365 Corporation on to the stock market, the company - which then promised to launch a network of sports websites - has morphed into something different. Something with a vastly more plausible business model, but still a dissatisfying investment proposition at this stage.

Eckoh Technologies (its new name, having got out of websites last year) has always ploughed money from its cash cow business, premium rate chatlines, into new projects, and now the investment is in speech recognition technology. It has sold this to cinemas, utilities and mobile phone companies to improve the way calls from the public are dealt with.

But there was a profits warning yesterday, because the profitability of its voting lines (for the likes of The X Factor and I'm a Celebrity...) has fallen sharply. This, Eckoh said, "disguised" a significant improvement in its financial performance, but its overall performance is deteriorating, its markets are tough and getting tougher, and the company needs to cut more costs.

The shares, down 1.75p to 9p, are exactly at the level when we told readers to steer clear three years ago. The prospects for the speech recognition technology are difficult to fathom, and clouded by the prospect of more competition in due course. The threats to margins in the mature businesses are easier to see. On balance, avoid.

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