Bottom Line: Schemes for those with strength

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The Independent Online
NORMAN LAMONT could be forgiven for feeling a bit miffed at BAT. No sooner had he unveiled his proposal to help alleviate the ACT burden that dogs it and other foreign earners than BAT and Barclays de Zoete Wedd, the brokers, come up with their own elegant scheme which, on the face of it, leaves everyone quids in.

BAT is in effect bribing its shareholders to take their dividends in the form of shares by increasing the scrip alternative to 33.9p, 50 per cent above the cash payment already declared. The increase is designed to ensure that none of its shareholders is worse off by taking shares. Non-taxpaying shareholders - such as pension funds - who would normally suffer from the lack of an ACT credit on scrip dividends - end up 20 per cent better off. Taxpayers are compensated for the capital gains tax that could be payable if they want to turn the shares into cash. And BZW is cutting the cost of doing so by offering to buy the scrip shares, ostensibly cost- free - although at a price equal to a dividend of 32.2p to compensate it for the risk of the time required to set the scrip price.

For BAT, the potential benefits are substantial. Depending on the take-up it will save up to pounds 97m of ACT and pounds 433m of cash outflow - which could cut its gearing from 54 per cent at the year-end to 41 per cent. And it claims the scheme will enhance earnings, despite an increase in its capital of up to 4 per cent, because of the 15 per cent-plus returns available on the projects in which it will invest the cash.

BAT is still undecided about whether it will take up the option of a foreign income dividend, proposed in the Budget, which would penalise non-taxpaying shareholders. Its ACT problem is largely due to depressed earnings at Eagle Star; recovery and increased exports from its tobacco factory in Southampton should alleviate, if not eradicate, it. And this solution at least treats all shareholders equally.

But Mr Lamont's work has not, however, been in vain. Shareholders are likely only to accept such schemes from those with respectable earnings cover, and whose balance sheets would have been strong enough to fund the cost of a cash dividend. The company, and its dividend payment, also have to be sizeable to make the exercise worthwhile. That rules out chronic ACT sufferers such as Trafalgar House and Pilkington, but Hanson, SmithKline Beecham and the banking group HSBC are likely to be studying BAT's example carefully.