ICI share price still haunted by past policies

The name of ICI has yet to appear on the ever-lengthening, speculative list of potential targets among the UK's industrial lite. That may soon change, however, with Thursday's publication of annual results which are likely to endorse the view that ICI still faces a tough task to rebuild investor confidence, even though profits are recovering strongly.

More than four years after Hanson audaciously parked a very large pile of cash on ICI's doorstep and awoke management from their slumbers, the share price is once again beginning to look rather tired. The shares have fallen from a 1994/95 peak of 868p to 731p.

To the outsider, the recent share price performance looks perverse given that ICI will almost certainly announce a sparkling rise in pre-tax profits for 1994 from £280m to well over £500m. Like other chemical companies, ICI is benefiting from the upswing in the chemical industry cycle. Analysts anticipate profits will increase further to nearly £700m this year and more than £800m in 1996.

Running parallel to that, ICI's operations are throwing off cash at such a rate that, remarkably for a company of this size, the balance sheet is now virtually degeared. ICI is close to achieving its objective of extricating itself entirely from the volatile world of bulk chemicals.

There remains, however, one very large problem which looks set to continue to divide the analytical fraternity and unsettle the share price until it becomes clear that it is being solved: the growth prospects for dividends and earnings per share.

James Capel, the stockbroking firm, dwells on this at length in an eight- page piece of research previewing this week's results. "On both yield and earnings multiple considerations it is difficult to justify the ICI share price above 700p," the report says starkly. Another broking firm, NatWest Securities, says it considers the shares "fundamentally overvalued".

The converse school of thought can be found at UBS, where Robyn Coombs, the chemicals analyst, last week reiterated a buy recommendation on the expectation of a near-doubling in earnings per share for 1995, to be followed by a 51 per cent climb in 1996, and a further 15 per cent gain a year later.

While the market is divided over ICI, what does appear to be common ground is that the company's past policies are still haunting the share price. Dividend cover was stripped bare in 1990, the year when ICI - having just hit the £1,000m profit mark for the first time - was hit by the recessionary collapse of bulk chemical prices.

The rebuilding process, identified as a priority, is slow and dividend cover of twice earnings per share is unlikely to be achieved until the end of next year. This leaves the scope for a dividend rise for 1994 very limited indeed. A 1p increase in the final payment to 18p is a possibility, but more seems unlikely.

While the situation for the next couple of years looks very different with dividend rises of least 5 per cent on the cards, the problem will remain of attaining a dividend yield that rides happily with a sharply decreasing p/e multiple on the shares. At current levels, an unchanged dividend for 1994 would equate to a gross yield of around 4.8 per cent while a 5 per cent increase to 29p a share in 1995 translates to about 5 per cent. Any increase above 5 per cent, however, will test the management's credibility with investors.

Only last year Sir Denys Henderson, the chairman, said the board had determined that ICI should focus on improving the quality of earnings in order to build dividend cover.

Having spun off its pharmaceuticals arm, (now known as Zeneca), ICI says it is determined to raise the return on capital of the remaining chemicals business. But whether the company has done enough to restore its standing in the City remains to be seen.

Start your day with The Independent, sign up for daily news emails
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Experienced Recruitment Consultant

£20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...

Recruitment Genius: Collections Agent

£14000 - £16000 per annum: Recruitment Genius: This company was established in...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...

Day In a Page

Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

How Isis profits from destruction of antiquities

Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

'If we lose touch we’ll end up with two decades of the Tories'

In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

The Arab Spring reversed

Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

Academic claims King Arthur was real - and reveals where he lived

Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
Who is Oliver Bonas and how has he captured middle-class hearts?

Who is Oliver Bonas?

It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
Earth has 'lost more than half its trees' since humans first started cutting them down

Axe-wielding Man fells half the world’s trees – leaving us just 422 each

However, the number of trees may be eight times higher than previously thought
60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

60 years of Scalextric

Model cars are now stuffed with as much tech as real ones
Theme parks continue to draw in thrill-seekers despite the risks - so why are we so addicted?

Why are we addicted to theme parks?

Now that Banksy has unveiled his own dystopian version, Christopher Beanland considers the ups and downs of our endless quest for amusement
Tourism in Iran: The country will soon be opening up again after years of isolation

Iran is opening up again to tourists

After years of isolation, Iran is reopening its embassies abroad. Soon, there'll be the chance for the adventurous to holiday there
10 best PS4 games

10 best PS4 games

Can’t wait for the new round of blockbusters due out this autumn? We played through last year’s offering
Transfer window: Ten things we learnt

Ten things we learnt from the transfer window

Record-breaking spending shows FFP restraint no longer applies
Migrant crisis: UN official Philippe Douste-Blazy reveals the harrowing sights he encountered among refugees arriving on Lampedusa

‘Can we really just turn away?’

Dead bodies, men drowning, women miscarrying – a senior UN figure on the horrors he has witnessed among migrants arriving on Lampedusa, and urges politicians not to underestimate our caring nature
Nine of Syria and Iraq's 10 world heritage sites are in danger as Isis ravages centuries of history

Nine of Syria and Iraq's 10 world heritage sites are in danger...

... and not just because of Isis vandalism
Girl on a Plane: An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack

Girl on a Plane

An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack
Why Frederick Forsyth's spying days could spell disaster for today's journalists

Why Frederick Forsyth's spying days could spell disaster for today's journalists

The author of 'The Day of the Jackal' has revealed he spied for MI6 while a foreign correspondent