View from City Road: Is British Gas really worried?

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IGNORE what British Gas says and look at what it does. It sounds worried about the outcome of the Monopolies and Mergers Commission investigation but it behaves as if it is confident of clearance.

It warns that its ability to maintain real dividend growth could be impaired by the MMC report. But it has increased its dividend for 1992 by 6 per cent, well above inflation. Would it have done this if it was as fearful as it makes out?

It says it has cut capital spending but this is only by comparison with its plans for an enormous increase. Actual spending rose by pounds 600m last year, taking borrowings to pounds 4.25bn or 50 per cent of shareholders' funds. Would British Gas have allowed this outflow if it believed it was going to be broken up?

The company blames its 3,200 job cuts on its loss of market share - competitors have 27 per cent of the contract market against only 5 per cent two years ago - and falling tariff prices. But they also represent long-overdue rationalisation of a company that employs more people now than it did at privatisation in 1986.

The threat of enormous upheaval prompted by the MMC, which British Gas expects to conclude its work in April, is nevertheless a useful background against which to modernise the group. It is natural that Cedric Brown, the chief executive, should want to exploit it.

A 7 per cent dividend yield with the shares at 289p suggests shareholders are discounting at least some of the risks. Those who trust British Gas's judgement on the outcome of the MMC inquiry should buy the shares. But most investors will want to wait for more evidence.

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