GEC plays defensive game

BLUE CHIP

THE start of the year is a useful opportunity to reassess the perenially fascinating, although in recent years often disappointing, GEC (394.75p).

A little less than a year ago, this column tipped the shares as a hold. Since then, they have risen a mere 20p, so the recommendation has been spot on.

However, in the intervening period, the pressure on chief executive George Simpson to transmute some of GEC's cash pile if not into gold, then at least a semi-precious metal, has become acute. Can 1998 herald a transformation for GEC, or will it remain a resolutely defensive stock on a decent yield?

In the short term, GEC's cash pile should grow, with the GEC-Alsthom power business flotation set to add another pounds 1bn to the current pounds 1.2bn pile. There may, however, be a problem. GEC-Alsthom does much of its business in Asia. The Asian financial crisis could complicate the flotation.

Still, GEC is not short of cash, and with all of it sloshing around, there is pressure either to spend it on acquisitions or to return it to shareholders. The latter could be achieved either by means of a special dividend or share buy- backs. GEC has in fact said that it will pursue more share buy- backs if it cannot find attractive enough deals to spend the money on.

The question then is whether the continuing consolidation of the European defence industry represents an attractive enough play for investors. While there are costs aplenty to be squeezed out of the sector, doubts must persist on its long-term growth prospects. And with European governments under pressure to curb their deficits in the run-up to monetary union, it looks as though the pressures on defence can only intensify. The shares remain a hold.

RICHARD PHILLIPS

Copyright: IOS & Bloomberg

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