MARKET COMMENT
Blue Chips Yielding 7% Or More

By Maynard Paton (TMFMayn)
March 5, 2003

Dividends are the new black. With corporate profit growth almost non-existent, every investor and his dog are now searching for income to boost their portfolio. Within the FTSE 100, ten blue chips offer dividend yields of 7% or more:

Share                 Price      Earnings    Dividend      Yield
                       (p)       per share   per share      (%)
                                    (p)         (p)
Royal & Sun              71        12.7         8.3        11.6*
Rolls-Royce           76.75        11.0         8.2        10.7 
Invensys               14.5         2.7         1.5        10.4*
Lloyds TSB              341        34.4        34.2        10.0
Scottish & Newcastle    335        41.4        30.1         9.0*
Reuters                 119        20.0        10.0         8.4
Friends Provident        88        12.5         7.3         8.3
United Utilities        577        51.6        47.8         8.3*
BAE Systems             112        17.3         9.2         8.2
Dixons                   90        11.4         6.5         7.3*

(* based on forecasts)

Annual results for Royal & SunAlliance (LSE: RSA)(NYSE: RSA) are due tomorrow [Stop Press: RSA reported a £940m loss for 2002, but declared a full-year dividend of 6p], while full-year figures for Invensys (LSE: ISYS), Scottish & Newcastle (LSE: SCTN), United Utilities (LSE: UU.) and Dixons (LSE: DXNS) will be published in late spring.

The numbers aren't expected to be pleasant. Royal & Sun could scrap its dividend entirely in order to maintain adequate solvency and capital ratios. Invensys is saddled with onerous borrowings and warned recently of a fall in profits. Dixons, fresh from a Christmas profit alert, now has to endure a Competition Commission investigation into its lucrative extended warranty business. And Scottish & Newcastle is set to incur greater-than-expected costs relating to a supply chain shake-up.

For the firms that have just announced annual figures, things also look a little bleak. Friends Provident (LSE: FP.), with results out today, admitted future dividend growth is now in doubt. Lloyds TSB (LSE: LLOY) is another financial institution where falling equities have put pressure on dividend cover and the balance sheet. Elsewhere, troubled Reuters (LSE: RTR) is forecast to generate earnings per share of 5.5p in 2003, about half its current payout.

Meanwhile, BAE continues to be dogged by hefty exceptional items, which puts into question its underlying earnings figure (shown in the table). Alongside some pension issues, Rolls-Royce (LSE: RR.) is another where significant 'exceptional' costs question the company's actual profitability.

Are any of the ten companies worth buying? It's fair say at least one of them will recover to produce a fantastic return over the next few years. Unfortunately, determining which ones will do well is anybody's guess. As a reminder of the dangers of picking 'cheap', problem companies, check out the subsequent performance of the five high-yield shares in this article.

More: Fool's Guide To Dividends