MARKET COMMENT
Dividends Still Point To A Cheap Market

By Stuart Watson (TMFTiger)
February 27, 2003

Much of the talk over whether the UK market offers good value at the moment centres on dividends. Overall, the UK market dishes up a yield of 3.8%, which is greater than the rate of return you can get from the most generous savings accounts, once you take income tax into account. The yield from shares also compares favourably with gilts.

Stock market bulls argue that, with dividends expected to grow in the long term, this makes shares good value. Bears, however, say it is more likely this signals the current level of dividends is unsustainable.

Many of the largest companies on the market have reported their performances for 2002 and announced what will happen to their dividends. The sustainability of dividends in the financial sector has come under particular scrutiny. The table below summarises what has happened to the top fifteen banks and insurers; together they represent around 20% of the UK's total market value.

Company                 2001     2002   Change
Abbey National         50.0p    25.0p     -50%
Alliance & Leicester   36.3p    39.9p     +10%
Aviva                  38.0p    23.0p     -40%
Barclays               16.63p   18.35p    +10%
Bradford & Bingley     13.0p    14.8p     +14%
Friends Provident       7.0p      Wed       -
HBOS                   28.0p    29.4p      +5%
HSBC                   49.0c      Mon       -
Legal & General        4.67p    4.78p      +2%
Lloyds TSB             33.7p    34.2p      +2%
Northern Rock          17.1p    20.2p     +18%
Prudential             25.4p    26.0p      +2%
Royal Bk of Scotland   38.0p    43.7p     +15% 
Royal & SunAlliance    16.0p     Thur       -
Standard Chartered     41.4c    47.0c     +12%

HSBC (LSE: HSBA)(NYSE: HBC), Royal & SunAlliance (LSE: RSA)(NYSE: RSA) and Friends Provident (LSE: FP.) are the only three yet to report. All are due to release numbers next week. While HSBC and Friends are expected to increase their dividends, Royal & Sun's payout is very much up in the air. It paid 4p per share as an interim dividend but profits have come under considerable pressure since then. It could even skip its final payout.

Overall, four fifths of these companies have posted increases. Indeed, many of the largest have delivered increases of more than 10%. However, Prudential (LSE: PRU) has already warned its investors that its 2003 dividend could be lower and Lloyds TSB (LSE: LLOY)(NYSE: LYG) has highlighted that future growth in profits may not be translated into growth in dividends.

Where dividends have fallen, the cuts have been savage. But taken together, payouts have been broadly maintained, although naturally there is still much uncertainty concerning what this year will hold. That makes the bull case look a little stronger than the bear one.

The author is a bull, long term.