Reporting companies find the `feelgood' factor

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The Independent Online
TOM STEVENSON

City Editor

When the Easter weekend falls this early in April it provides a welcome break for analysts and investors, who can feel pretty battered by the annual reporting season's torrent of financial information. Within the past month alone, more than 500 quoted companies have reported figures, mainly full-year results for 1995.

With so many figures filling the financial pages, it can be difficult to see the wood for the trees, so the Independent, in association with Hemmington Scott, the financial information publisher, has done a survey of the results for the largest companies reporting recently.

Since the end of January, when the reporting season really starts to get under way, 58 of the constituents of the FT-SE 100 index of Britain's largest companies have reported results. While the "feelgood" factor has eluded the rest of the country, the numbers suggest that corporate Britain is in pretty good shape - profits have been surprisingly good and dividends notably generous.

Of the 58 companies, which includes a representative range of retailers, banks, builders, oil companies and leisure stocks, only 10 announced lower profits than a year ago, with 48 reporting growth.

Disappointments included P&O, the cruises to ferries group, where investor unrest forced Lord Sterling to formulate a pounds 1bn cash-raising exercise to attempt to boost shareholder value. Builders' merchants Wolseley and Tarmac fell as the construction sector's woes continued, British Gas's problems persisted and Unilever struggled to cope with pricing pressures. But these were the exceptions that proved the positive rule during February and March.

A raft of insurance companies benefited from an uptick in that sector's pronounced cycle and General Accident, Sun Alliance, Legal & General, Commercial Union, Royal Insurance and the Prudential all recorded big jumps in profits. The rest of the financial sector also joined in the fun, with Barclays, HSBC, National Westminster and Lloyds TSB notching up at least double-digit rises in profits.

Industry was not to be left out. ICI continued to ride the chemicals cycle and to benefit from its relentless cost cutting in recent years to see its profits jump from pounds 408m to pounds 927m. BOC, often seen as a bellwether of the world economy, increased its first quarter return by a healthy 13 per cent from pounds 89m to pounds 101m.

Recovery from previous disasters was a recurrent theme and Kingfisher, the Woolworths, B&Q and Superdrug group, continued to put its recent problems behind it with a 28 per cent profits rise. Ladbroke reversed 1994's huge losses into a respectable pounds 95m profit despite the assault on its betting arm by the National Lottery.

While the profits rises have been striking, what has been really noticeable about this year's reporting season is the extent to which companies are choosing to return value to shareholders, some by share buy-backs such as Guinness's, many with dividend increases way in excess of the rate of inflation.

As the table shows, some of the increases have been extremely chunky and of the 58 companies included in the survey only Redland reduced its payout. Wolseley's 5 per cent increase, which puts it in the laggards category, still represents a dividend rise worth almost twice the increase in the cost of living.

Out of 58 companies, 29, or half the total, increased their payout by more than 10 per cent. As one analyst quipped, you can get a better return on your cash by investing in Abbey National shares than by putting the money in an Abbey account - and the income grew by 22 per cent last year.

The Independent survey confirms the message from the equity market strategists contacted this week, who said the results season emerged slightly more positive than they had expected. Bob Semple, at NatWest Markets, said that of the 163 companies he tracked, 23 had disappointed compared with 46 which had turned out better than forecast.

Paul Walton at Goldman Sachs took a more jaundiced view, seeing too much optimism in consensus profits growth forecasts of about 11 per cent for the current year. He believed the cycle in operating margins was reaching a peak and saw an additional risk to the equity market in bond yields which he forecast to rise.

But the main reason for his bearish stance related to political risk, which he thought the City was yet to take seriously. With the market likely, in his view, to end the year at 3,400, compared with Thursday's close of 3,755.6, he recommended taking shelter in late cycle stocks such as stores, services, transport and chemicals.

The bull argument was provided by Mark Tinker at HSBC James Capel, who focused on dividend growth, which he expected to continue at between 8 and 9 per cent for the rest of the year. Compared with inflation of less than 3 per cent, he said that represented an unusually good real return and he expects markets to reach a year-end target of 4,000.

Dividend growth: Engine room of the market

Leaders % change Laggards % change

BP +45 Redland -14

Standard Chartered +38 P&O unchanged

Royal Insurance +33 Ladbroke unchanged

Lloyds TSB +32 Enterprise Oil unchanged

BAe +25 Hanson (Q1) unchanged

Barclays +24 British Gas unchanged

Argos +24 Tarmac unchanged

Reuters +23 Rexam +2

Shell +23 Cadbury Sch +3

Abbey National +22 Wolseley +5

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