Beating a dividend retreat

DIVIDENDS are immensely important to investors. But nowhere are they more critical than to insurers such as the Prudential. As one of the biggest investors on the British stock market, with £112bn of assets under management through M&G, total returns (income from dividends and capital gains) is the lifeblood of the Pru's business.

So taking a meat axe to the dividend, as the Pru has done, is like a commander sounding the retreat on the field of battle.

Jonathan Bloomer becomes the first chief executive since 1914 to blow this bugle, a period that embraces two world wars, the Great Crash and the meltdown of the FTSE in the mid-1970s.

The Pru says its decision is backward looking in that it follows three appalling years on global markets. But that begs the question as to why it didn't act earlier to preserve cash.

One wonders how the Pru would find the necessary capital if it wanted to expand in the US where it is underweight in the biggest retirement market in the world.

The good news about the dividend cut is that although it nets a relatively modest £200m of cash flow, the move will beef up its capital base and allow it to write a good chunk of new business of between £4bn and £5bn.

So in that sense it will help the group to expand. Moreover, not everyone sees it negatively. Credit rating agency Standard & Poor's said its ratings for the Pru would be unchanged and argued that the dividend cut 'demonstrates the group's commitment to manage its cash flow to support its new business'. There is no virtue in bleeding the business dry to pay the dividend.

Nevertheless, the Pru faces serious challenges ahead. Costs are too high in Asia, its fastest-growing market. It will be seeking to bring them down by consolidating operations, currently organised on a national basis, in Kuala Lumpur.

In its home market of Britain, confidence has been shattered by mis-selling scandals, the endowment crisis, bonus cuts and a population who would far rather spend than save (see below). The Pru has a stake in the credit card market through Egg. An additional problem is the government's determination to bear down on costs through the creation of 'Sandler' products that can be sold without advice, but will offer poorer returns to the manufacturer.

In the US, where Bloomer lost out to AIG in the fight for American General, the Pru faces the perils of producing adequate returns in a deflationary environment where its offshoot, Jackson Life, is in competition with bigger rivals.

Until business performance improves it is hard to imagine Pru's investors becoming enthusiastic about a rights issue to fund acquisitions. Bloomer is being tested under fire, but bravery may not prove enough.

Debt time bomb

WHEN it comes to borrowing, Britain is in a class of its own. The latest consumer credit figures, up by a record £9.97bn in June, shows an unstinting appetite for debt.

Mortgage lending also continues to rise and is up 13.8% year on year, even though the housing market may have passed its peak.

All this is worrying Roger Bootle of Capital Economics, the British economist who best predicted the end of inflation. Low interest rates and rising house prices have driven average household debt to £45,000, or 130% of income. So far there is little evidence people are struggling with this burden.

But as Bootle notes, conditions could change rapidly. For the moment, high interest rates do not look a danger, although surging money supply and rising government borrowing could eventually drive them higher.

There are other worries for householders that could potentially-lead to a debt meltdown. Unemployment is presently propped up by the expansion of the public sector. That may not last for ever. Critically, there are growing concerns about pensions shortfalls and the need to make provision for old age.

The biggest threat is seen as a sharp correction in the housing market. If households were to seek to reduce liabilities by paying down debt, spending could drop sharply next year.

That is a time bomb most economists have yet to feed into their growth projections.

Browne bonanza

AT least there is one British company which has no pension fund crisis. At a stroke, BP is transferring £1.4bn from profits to correct the shortfall in its defined benefit scheme. Easy-peasy when profits are more than 80% up at £4.2bn.

This is the kind of neat transfer payment from motorists to workers by chief executive Lord Browne that another Brown - Gordon - might be proud of.

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