Pru to cut dividend for first time since 1914 war

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The Independent Online

Prudential, Britain's second largest insurer, is set to slash its dividend in a bid to conserve cash after three years of falling stock markets.

Prudential, Britain's second largest insurer, is set to slash its dividend in a bid to conserve cash after three years of falling stock markets.

This would be the first time Prudential has cut its dividend since the beginning of the First World War in 1914. The City has been bracing itself for a cut for some months following the strain on all insurers' capital from the downturn in the stock market. Historically Prudential has paid a dividend compared to earnings which has been more generous than many of its rivals.

Analysts expect the cut to be about 40 per cent, brining Prudential's dividend down to 16p. The reduction would save Prudential £200m a year. Last year the insurer's 26p dividend cost it £519m, in a year when the insurer made operating profit of £432m and net cash inflow from operating activities of £31m.

Prudential yesterday refused to comment on its plans for the dividend. However, David Clementi, the new chairman, has already paved the way earlier this year for a dividend reduction.

"The board felt that it needed, given the uncertainty in capital markets, to retain flexibility and could not recommit to the policy of progressive dividend increases from the current level," Mr Clementi said in February.

That statement sent Prudential's shares down 18 per cent. Many investors took flight from the company after feeling the statement was at odds with earlier signals that Prudential was not going to reverse its policy of increasing its dividend year on year.

Prudential is seen as a strong UK life company whichd does not need to cut the dividend in half in order to meet its financial obligations. However, the entire life insurance sector has suffered an erosion of capital because of the slump in equity markets, forcing insurers to cut bonuses to policyholders.

Aviva, the UK's largest insurer, slashed its dividend by 40 per cent last year to fund growth in the company, and the Britannic has had to abandon a dividend payment for 2002 entirely. Last week JP Morgan speculated Legal & General would also have to lessen their payouts to shareholders.

The speculation surrounding the Prudential's dividend ironically follows advice offered to stock market companies by one of its own directors, Michael McLintock, who stressed the importance of companies' paying out a decent sum to shareholders.

In a letter sent to 1,000 companies in October, Mr McLintock, chief executive of Prudential's fund management arm, M&G, said "dividends will become increasingly significant, and dividend yield will play an increasingly important part in the market's evaluation of a company's shares". He advised companies to enlist in fresh capital before cutting their dividend and said it was "likely to be increasingly appreciated in the economic and stock market conditions" faced for the foreseeable future.