Britain's biggest companies could afford pounds 30bn buy-backs

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BRITAIN's biggest companies have enough firepower to finance pounds 30bn worth of share buy-backs or acquisitions, according to a report published yesterday, writes Michael Harrison.

The latest analysis by the US investment bank Lehman Brothers estimates that Britain's 350 biggest non-financial companies could halve the cash in their balance sheets and still be less geared than their US counterparts. With the buy-back rage set to grow further this year, Lehman estimates that British Telecom could afford to return pounds 5bn to shareholders, and BP pounds 600m. BTR last week announced a pounds 2bn share buy-back.

The abolition of dividend tax credits has reduced the attractions of equity for tax-exempt UK funds while the phasing out of advanced corporation tax has made share buy-backs more tax efficient.

Lehman said reducing cash holdings by pounds 30bn would raise the net debt to equity ratio from 0.4 to 0.6 per cent - on a par with the European average but still well below the figure in the US.

Meanwhile, in a separate Merrill Lynch/Gallup survey, UK fund managers have been buying heavily into FTSE 250 stocks, reflecting renewed confidence in the economy. The survey also revealed a general decline in enthusiasm for UK equities as a whole. Trevor Greetham, global strategist at Merrill Lynch, said: "Medium-sized companies tend to be more sensitive to the domestic UK economy than their larger FTSE 100 cousins. The growing sense that the UK economy may not be slowing so rapidly after all may help to explain why fund managers are at last paying more attention to these stocks."

Thirty-eight per cent of UK fund managers said they preferred FTSE 250 stocks to FTSE 100 stocks. The decline in buying interest in UK equities as a whole indicates UK fund managers are now happy with their cash levels.