Dividend cut on the cards at ICI despite earnings rise

ICI kept the City guessing yesterday over its dividend policy but a cut in the payout - the first in 18 years - looks to be increasingly on the cards.

ICI kept the City guessing yesterday over its dividend policy but a cut in the payout - the first in 18 years - looks to be increasingly on the cards.

Unveiling a 35 per cent rise in first-half profits to £224m and an unchanged dividend, ICI's chief executive Brendan O'Neill promised analysts that the company would clarify its position by the end of the year.

But the indications are that support is growing within the ICI board for a dividend cut. The last time ICI cut the dividend in 1982, following the announcement of third-quarter losses, it sent shockwaves through the market and manufacturing industry.

But analysts believe today that a dividend cut would be much better received and could even provide the badly-needed boost to the ICI share price that Mr O'Neill has been seeking.

Halving the dividend could save ICI £110m, bringing it into line with dividend yields elsewhere in the speciality chemicals sector and giving ICI the cash to invest in higher growth businesses. The ICI board has been closely monitoring the dividend policy of other blue chips such as Marks & Spencer and British Airways to gauge potential City reaction to a cut in its own payout.

Despite half-year profits at the top end of expectations, ICI shares slid a further 6p to close at 474p - down more than 40 per cent on their level a year ago. The dividend is covered just under two times by earnings. But the more important ratio, interest cover, has risen to 3.5 times with strong profit performance more than offsetting a rise in net debt to £2.9bn.

Alan Spall, finance director, said that all four of ICI's core speciality chemicals, paints, National Starch, Quest divisions had increased sales and operating profits despite soaring oil prices which used to wreak havoc on ICI. These were offset by lower prices for natural ingredients such as corn, tapioca, truffle oil and tallow used in fragrances and flavouring. ICI also benefited from an improved product mix, price rises to end customers and improved cost savings.

Mr O'Neill said the outlook in ICI's markets was "generally favourable". He said that the group had not detected any softening in the US market despite fears that the economy might be heading for a sharp correction. Business levels in the Far East, meanwhile, were back above their levels before the Asian economic crisis struck and top-line sales growth was going "remarkably well".