Bottom Line: Argyll may need to cover its options

A YEAR ago the dividend yield of Argyll Group began to part company with the yield for the stock market as the shift in the rating of supermarket groups from high-spending growth stocks to cash-generative quasi-utility stocks began.

Supermarket shares now yield far more than the market - Argyll 5.6 per cent against a market average of 3.8 per cent. But hopes that dividends might be pushed forward indefinitely by reducing cover in current tough trading conditions look misplaced.

Sir Alistair Grant, Argyll's chairman, in effect scotched this notion yesterday by ruling that future payments would reflect progress, or earnings per share. This year is clearly an exception. Although Argyll is warning of slightly lower profits to April it also proposes to lift its annual payout from 10.9p to 11.5p. As the dividend payment is barely twice covered by earnings, such an increase, which follows a rise at the interim stage, may indeed be generous.

None the less, Argyll is likely to remain attractive on a yield basis. It is hard to imagine the company letting the income funds down so soon after drawing them in.

And assuming the share price continues to meander and dividends are at least maintained, the return will remain relatively high.

Time is needed to make some sense of the Argyll situation which ultimately depends on the fortunes of the supermarket sector as a whole.