View from City Road: BBA faces up to reality

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The Independent Online
Shares in the automotive components group BBA are yielding 2.7 per cent, a 30 per cent discount to the market average, after the company forecast a 40 per cent cut in its 1994 dividend. Shares in the automotive component group T&N are yielding 5.7 per cent, a 45 per cent premium to the stock market average. What does this tell us?

The BBA board has been pushed by its chief executive Robert Quarto - self-styled 'new kid on the block' following his arrival from BTR four months ago - into facing reality after two years of dividend payments without the earnings to back them up.

Interestingly enough, BBA shares, after plunging 19p initially, closed only 9p lower at 207p despite the grim and genuinely surprising news on the dividend. The rationale for this is plain.

Mr Quarto says that he expects BBA to achieve double-figure profit margins within two or three years, compared with 6.3 per cent in 1993. To judge by the hefty pounds 77m rationalisation charge - equivalent to 5.5 per cent of BBA's 1993 sales - Mr Quarto means business.

Armed with this information and the fact that BBA thinks twice earnings cover is appropriate for dividend payments, the market has realised BBA is likely to be producing 15 per cent dividend growth for the next couple of years. This is attractive while recovery doubts persist.

Contrast this with T&N, which has also failed for years to produce enough earnings to cover its dividend payment. But it has made rights issues and paid its total 1993 dividend in one go via an enhanced scrip issue at the interim stage. Its dividend will not grow for quite a while, and with European markets in slump, some risk attaches to any payment. Expect BBA to outperform T&N.