ICI share price still haunted by past policies

The name of ICI has yet to appear on the ever-lengthening, speculative list of potential targets among the UK's industrial lite. That may soon change, however, with Thursday's publication of annual results which are likely to endorse the view that ICI still faces a tough task to rebuild investor confidence, even though profits are recovering strongly.

More than four years after Hanson audaciously parked a very large pile of cash on ICI's doorstep and awoke management from their slumbers, the share price is once again beginning to look rather tired. The shares have fallen from a 1994/95 peak of 868p to 731p.

To the outsider, the recent share price performance looks perverse given that ICI will almost certainly announce a sparkling rise in pre-tax profits for 1994 from £280m to well over £500m. Like other chemical companies, ICI is benefiting from the upswing in the chemical industry cycle. Analysts anticipate profits will increase further to nearly £700m this year and more than £800m in 1996.

Running parallel to that, ICI's operations are throwing off cash at such a rate that, remarkably for a company of this size, the balance sheet is now virtually degeared. ICI is close to achieving its objective of extricating itself entirely from the volatile world of bulk chemicals.

There remains, however, one very large problem which looks set to continue to divide the analytical fraternity and unsettle the share price until it becomes clear that it is being solved: the growth prospects for dividends and earnings per share.

James Capel, the stockbroking firm, dwells on this at length in an eight- page piece of research previewing this week's results. "On both yield and earnings multiple considerations it is difficult to justify the ICI share price above 700p," the report says starkly. Another broking firm, NatWest Securities, says it considers the shares "fundamentally overvalued".

The converse school of thought can be found at UBS, where Robyn Coombs, the chemicals analyst, last week reiterated a buy recommendation on the expectation of a near-doubling in earnings per share for 1995, to be followed by a 51 per cent climb in 1996, and a further 15 per cent gain a year later.

While the market is divided over ICI, what does appear to be common ground is that the company's past policies are still haunting the share price. Dividend cover was stripped bare in 1990, the year when ICI - having just hit the £1,000m profit mark for the first time - was hit by the recessionary collapse of bulk chemical prices.

The rebuilding process, identified as a priority, is slow and dividend cover of twice earnings per share is unlikely to be achieved until the end of next year. This leaves the scope for a dividend rise for 1994 very limited indeed. A 1p increase in the final payment to 18p is a possibility, but more seems unlikely.

While the situation for the next couple of years looks very different with dividend rises of least 5 per cent on the cards, the problem will remain of attaining a dividend yield that rides happily with a sharply decreasing p/e multiple on the shares. At current levels, an unchanged dividend for 1994 would equate to a gross yield of around 4.8 per cent while a 5 per cent increase to 29p a share in 1995 translates to about 5 per cent. Any increase above 5 per cent, however, will test the management's credibility with investors.

Only last year Sir Denys Henderson, the chairman, said the board had determined that ICI should focus on improving the quality of earnings in order to build dividend cover.

Having spun off its pharmaceuticals arm, (now known as Zeneca), ICI says it is determined to raise the return on capital of the remaining chemicals business. But whether the company has done enough to restore its standing in the City remains to be seen.