View From City Road: Redland relaxes on dividend cover

Robert Napier, the chief executive of Redland, thinks that with low inflation in the 1990s a twice-covered dividend need not be the holy grail it was in the 1980s. It is not hard to see why.

Last year's 25p payment was only just covered by earnings and it could be 1997 before profits in recession-hit Britain, France and the US reach the 50p required to cover it twice - and that is assuming that the remarkable resilience of the German businesses does not falter.

Redland is not alone in believing it can live with lower dividend cover - others, such as United Biscuits, echo that sentiment.

But their argument seems to owe a lot more to the current low level of cover, in Redland's case, or pedestrian growth prospects, in United Biscuits', than to the likely economic conditions of the 1990s.

The point of ensuring that dividends are covered an average of twice is to ensure that shareholders are not too affected by fluctuations in the economy. Cover may be higher in the good years to compensate for the fact that it will drop in the bad ones. That should not change if the 1990s is a decade of low growth and low inflation; it simply means that earnings and, by implication, dividends are likely also to grow more slowly.

The two enhanced scrip dividends paid by Redland this year underlined the advance corporation tax headache caused by its determination to maintain its payout.

And although British profits could double to pounds 45m this year, the tax bill on that will still be far too low to offset the pounds 32.2m ACT payable on a maintained dividend.

The premium 5.8 per cent yield on the shares reflects shareholders' concern about dividend prospects as much as the fact that, with just a fifth of its sales from Britain, it is less geared to recovery here than many of its rivals.