The group comfortably beat City expectations to report taxable profits of pounds 150m for the year to 13 December, compared with pounds 109m last time. However, Coats' shares slipped by 20p to 260p and analysts reduced profit forecasts for the current year.
The stock market was also disgruntled because Coats said it wanted to pay dividends by issuing shares rather than cash. Coats is set for its second year of a so-called enhanced scrip dividend alternative. The market was unsettled because the practice dilutes the value of existing shareholdings.
If Coats pays this year's interim and final dividend by enhanced scrip, the number of shares in issue will have expanded by more than 10 per cent over the two years.
Market sentiment also suffered because Coats' underlying profitability was less promising than the pre-tax figure suggested. Operating profit, ignoring the contribution from newly acquired businesses, was down 2 per cent at pounds 146m.
Neville Bain, chief executive, said: 'We have, however, done ourselves an injustice by including our reorganisation costs in operating profit figures.' Many companies separate rationalisation costs in the hope that investors will ignore them.
Acquisitions added pounds 28.4m to operating profit. Coats took control of a joint venture in India that was particularly lucrative. One-off exceptional gains from property disposals and the sale of unwanted businesses flattered the figures further.
Problems in thread and in Europe drove the underlying profits down. On a like-for-like basis operating profit from Coats' thread business declined by 10 per cent. The fall in operating profits earned on the Continent was 32 per cent.
Profits from the UK also fell, but only because the company had to pay pounds 9m to its pension fund. Ignoring the pension payment, operating profit increased by 7 per cent.
The US contribution benefited from currency gains of pounds 7.2m. Comparable profits advanced slightly.
Coats has experienced severe problems in Brazil in recent years. It lost pounds 15m in 1992 but losses were reduced to pounds 5m last year. Mr Bain said he was expecting profits from Brazil this year. Recovery in Brazil drove a 120 per cent increase in the South American contribution.
Analysts reined back current- year profit estimates from about pounds 180m to pounds 160m.
The cash dividend is 8p, up from 7.25p, but the enhanced scrip is 50 per cent higher. Earnings per share were 14.6p (10p).
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