Outlook: CGNU gives dividend payouts another beating

ITV meltdown; HBOS funding
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The Independent Online

One of the reasons pension returns are under such pressure is that so few companies pay a decent dividend any longer. CGNU and Royal & SunAlliance are two of those that do, or rather did, for now they too want to join the bandwagon and shrink the payout to investors. But please don't call it a dividend cut.

Actually what's happening is a "rebasing" of dividends so as to conserve capital to fund all those exciting new growth opportunities out there for the taking in the insurance and life assurance markets. So there you are. It is for you, the shareholders, that the payouts are being slashed. You know it makes sense. Well it's a nice try, but for some strange reason, the stock market just doesn't seem to get it. CGNU shares slumped 10 per cent yesterday. Just another rebasing from which to rebuild?

Royal & Sun announced its intended cut last November while CGNU grasped the nettle yesterday under cover of another of those silly name changes that companies so much like to indulge in these days. CGNU, an amalgam of Commercial Union, General Accident and Norwich Union, scarcely means anything to anyone, but nor does Aviva unless you speak Hebrew, where it means the season of spring. The company hopes it will convey an image of zest for life and good health. What a shame there's so little sign of it in the share price.

To be fair on Richard Harvey, CGNU's chief executive, CGNU has been paying out proportionately much more than its leading competitors for some years now while at the same time achieving some pretty startling growth rates. In the last 18 months alone, new life sales are up 30 per cent. To keep growing at anything like that sort of pace requires upfront investment. Cutting the dividend by 40 per cent will save the company £340m a year. Mr Harvey reckons this is a better way of raising the required capital than having a rights issue or share placing, and he may be right.

In the bad old days, companies would routinely launch rights issues with no particular use in mind for the money other than to sustain the dividend until the capital ran out again. Shareholders were often paying themselves with their own money. Mr Harvey's dividend cut is perhaps a more honest approach to the business of raising new capital.

Even so, it's no wonder the market reacted so negatively. At the intended 5 per cent rate of dividend growth, it will take 10 years for the dividend to return to where it is at the moment. Put another way, at the present level of dividend, it would take the company 19 years to repay its share capital. At the new rate it will take 31 years. Enough said.

ITV meltdown

When in a hole, call in the management consultants. Well, it may have worked in the old days, but it doesn't any more. There could be no clearer a sign of the desperation that now afflicts the management of ITV than yesterday's announcement that the boards of Carlton and Granada have appointed Deloitte & Touche to assist in a "fundamental restructuring of ITV Digital's cost base". Is this really the best that the combined management prowess of Michael Green and Charles Allen, chairman respectively of Carlton and Granada, can come up with after three years of mounting and calamitous loss in ITV's digital experiment – to call in the management consultants? Just what are these people paid for?

That ITV is in the most terrible mess won't be news to anyone, but that Carlton and Granada seem to have so little idea on what to do about it is a truly damning indictment of these two companies. If the problem were confined to ITV Digital, then it might be possible to give them the benefit of the doubt. This always was going to be a difficult project, and pitched against the Maverick tactics and power of Rupert Murdoch's BSkyB, it was possibly doomed from the start. But actually the crisis at ITV Digital is symptomatic of a much deeper malaise in ITV.

After years of milking its monopoly of British TV advertising for all it was worth, ITV is finding itself punished as never before for its past arrogance and complacency. There are lots of other places advertisers can spend their money these days, and ITV has found itself hit disproportionately hard by the present downturn. Caught between the pincer movement of pay-TV and a resurgent BBC with big ambitions on the commercial front and an inflation-proofed income to back them up, ITV is like piggie in the middle, not knowing which way to run.

Whether a merger of Granada and Carlton would provide a solution is anyone's guess, but it would, presumably, at least have put an end to the infighting that so paralyses all ITV attempts to do. In any case, Granada is meant to have come close to putting formal merger proposals in recent weeks, complete with P&O Princess-style poison pills to deter foreign predators during the inevitable, year-long Competition Commission inquiry that would have followed.

As it is, ITV has even managed to cock that one up too. The market realised something was afoot, the price galloped away from Granada, and everyone got cold feet, not least about prospects of obtaining clearance from the competition authorities. ITV may be losing advertising hand over fist, but together, the two companies still have a dominant share of all TV advertising in Britain. Carlton thoroughly deserves that much dreaded bid from Bertelsmann. As it stands, it's not worth preserving for the nation.

HBOS funding

James Crosby, chief executive of HBOS, has chosen the new equity route to raising more capital, in preference to CGNU's approach which is to cut the dividend but, a bit like CGNU, it is not entirely clear that he can find a better use for the cash than the markets can, or indeed what he wants it for at all.

There has always been a nagging doubt about HBOS's so far quite costly assault on the current account, small business and life assurance markets. Raising £1.2bn in new equity is bound to bring those doubts to a head once more. Most investors worry that there's already too much, not too little, capital invested in mainstream banking, and it is certainly odd that an old style mortgage bank widely recognised as awash with surplus capital when it was floated should now want even more of the stuff. Halifax has since merged with the more capital hungry Bank of Scotland, but this doesn't entirely answer the point. The historical precedents bode ill. Barclays famously came to grief after launching a rights issue 14 years ago to fund its own dash for growth ahead of the last economic slowdown. Mr Crosby will remember it well. He was a fund manager at the time.

HBOS argues that it needs the capital to bolster reserves in its life and savings business. The plan is to tempt customers into buying more of these products with lower upfront fees, even if that means sacrificing group profitability in the short-term. Without the share placing, it would be impossible to chase these opportunities without sacrificing HBOS's strategy to grab market share in the current account and corporate banking market. HBOS is already feeling the strain of its ambitions. Net cash inflows were £1.25bn lower last year than in 2000, at £3.24bn. The commitment to a progressive dividend policy is only adding to the pain. Everyone wants capital, it seems, but nobody is able to promise a rapid payback.

j.warner@independent.co.uk

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