View from City Road: Sedgwick yields to law of gravity

SEDGWICK GROUP earns about 40 per cent of its brokerage revenue from the United States. Hit simultaneously by continuing falls in US premium rates, lower US interest rates and a sliding dollar, the insurance broker has finally abandoned its five-year high-wire act and is cutting dividends sharply to a level it can afford.

Dealers had been anticipating a cut for some time. Up until Monday night Sedgwick shares had come back from a peak of 237p in mid-May and underperformed the stock market by 25 per cent.

But someone moved the safety net down overnight and Sedgwick shares plunged another 34p to 110p at the prospect of a halved dividend of 6p, which is much worse than expected.

Despite advice from David Rowland, the urbane chairman of Sedgwick and likely future chief at Lloyd's, not to extrapolate a halving of pre-tax profits in the second quarter, that is exactly what the market did to arrive at estimates of pounds 60m pre-tax for 1992 as a whole.

This level of profits would cover a 6p payment 1.3 times. Warnings from Mr Rowland, with probable understatement, that 1993 would not be an easy year suggest that dividend growth from this new base will be, at best, modest.

Hedging of dollar income and interest rates has alleviated the downward trend in US brokerage revenues and investment income. But unless there is a marked reversal in either item the pressure will continue.

Sedgwick achieved a rate of dollars 1.71 on dollar revenue into the UK in the first half against a current rate of dollars 1.93 and 6.7 per cent on US dollar deposits compared with 3.5 per cent now.

Meanwhile, US premium rates in a highly oversupplied market are still falling by between 10 and 30 per cent in certain retail markets.

It is overshadowing progress in London, excluding a surprise dip into losses at River Thames, and a rock-steady performance on expenses. A yield of 7.2 per cent is a prop rather than an attraction.

(Photograph omitted)