Time for BTR to cut the payout

The Investment Column
BTR's traditional lunchtime briefing of analysts in the Savoy yesterday was a tenser affair than usual. The conglomerate was keen to reassure the collected brokers whose recommendations to clients over the past year or so have left them with considerable amounts of egg on face.

Since the shares peaked in the summer of 1993 at just over 400p, they have fallen by a half relative to the market. At 255p they stand more than a fifth lower than they did at the beginning of the year. Like Hanson before it, BTR has fallen out of favour with a painful bump.

Conversation focused on two main areas. First the dividend, which for the first time in thirty years has started to look in danger of being cut. No comment on that subject was the rather unsatisfactory result, suggesting that house broker BZW's forecast of a same again payout of 14.7p, excluding any foreign income payment, was probably fairly well informed.

At that level, the shares yield over 7 per cent, right up there with the FT-SE 100's other disaster stories, Hanson, British Gas and P&O. That's a harsh measure of a company that for years has produced impressive growth in the payout, but not unreasonable given the remaining uncertainty that Ian Strachan will take the bull by the horns in September and actually trim a payout that in truth the company cannot really afford.

With dividend cover of less than 1.5, BTR is plainly paying too much of its hard pressed cashflow back to shareholders at a time when capital expenditure demands, the second big topic of conversation at lunch, are on the increase.

With interests in so many fast-changing industrial fields around the world, BTR is having to spend very fast just to stand still in demanding markets such as automotive components where lack of investment is a sure fire recipe for failure.

BTR's other cashflow problem stems from the unexpected collapse in the share price which has put pounds 220m of warrants out of the money. The company would not admit as much but it was undoubtedly counting on the conversion of three tranches of warrants over the next three years, effectively a rolling rights issue, to fund its capital and dividend paying commitments.If the warrants are not converted the pressure can only increase on a disposal programme already running at a good lick.

BTR's biggest hope is to get itself reclassified as an engineering company so it can start to benefit from the premiums to the market rating enjoyed by companies such as Siebe, Smiths Industries and TI. Until it does, BTR is likely to continue trading at a discount. As Hanson has shown, demerger is not necessarily a panacea for shareholders and the outlook remains uninspiring.