View from City Road: Reuters retains financial strength

FOR a company that makes a tidy living from the trillion-dollar-a-day foreign exchange market Reuters Holdings, which earns 80 per cent of its revenues overseas, seems to have been as unprepared as anyone else for sterling's unceremonious ejection from the exchange rate mechanism last September.

Reuters traditionally covers forward between 40 and 90 per cent of its expected overseas revenues on a 12-month rolling basis. It seems to have been towards the high end of that range last autumn since the company was warning yesterday of hedging losses in 1993.

In 1992 pre-tax profits, up 12.6 per cent to pounds 383.2m, were already held back by a swing from currency gains of pounds 5.7m to losses of pounds 5.8m. Hedging losses will squeeze this year's margins despite lower reorganisation costs and larger benefits from reduced staff numbers, which have fallen by 5 per cent in two years.

But operating margins of 20 per cent mean that cash generation remains predictably impressive. Heavy capital spending, by Reuters' past standards, has not prevented net cash balances rising by pounds 207m to pounds 710m. Higher net interest, with hedging profits in 1992 offsetting the effects of lower interest rates, accounted for two-thirds of Reuters' pre-tax profits increase.

Such financial strength allowed dividends to rise by 24.7 per cent last year, with a final of 15.9p, or twice as fast as the increase in earnings, taking cover below three times.

But investors, however grateful for this, are keen to see Reuters deploy its cash in the business. The company is certainly aware of such concerns and may well launch some form of deal programme this year.

Meanwhile, hefty spending on personal computers will aid progress in spreading Reuters' new Dealing 2000-2 and Globex order matching products for the foreign exchange and derivatives markets.

Past investment in Instinet seems to be paying off. A pounds 14.8m contribution helped to drag North America into the black.

Reuters appears to be on the positive side of cautious about revenue growth this year. On forecasts of 14 per cent growth to pounds 440m or so pre-tax this year and even faster dividend growth, a multiple of 19.5 at 1,382p, down 15p, and a historic yield of 2 per cent look sustainable.