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MARKET COMMENT
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"Investors should remember that their scorecard is not computed using Olympic-diving methods: Degree-of-difficulty doesn't count. If you are right about a business whose value is largely dependent on a single key factor that is both easy to understand and enduring, the payoff is the same as if you had correctly analysed an investment alternatively characterized by many constantly shifting and complex variables." -- Warren Buffet Prudential (LSE: PRU) investors should take a leaf out of Buffett's book. The financial services group today reported 2002 results that positively brimmed with 'shifting and complex variables'. Unfortunately, those who didn't understand these factors have had their comeuppance. For far too long, Prudential shareholders have focused on the company's dividend yield without paying due attention to profits. Although Prudential announced the full-year payout would increase 2.4% to 26.0p per share, the firm today admitted it would be 'inappropriate to recommit at this stage to the current dividend policy'. With the shares diving 55p (14%) to 338p in response, investors can forget all about their 7.7% yield. So what happened to profits? Well, which one? The achieved basis profit? That inched up to £850m after tax. Statutory profit? Ah, that fell a third to £314m. Note too that these figures are derived before goodwill, exceptional items, 'short-term fluctuation in investment returns' (either £1.4b or £200m, depending on your accountant's view) and the 'effect of change in economic assumptions' (£467m). The main variation between the two profit figures? The achieved basis profit also includes the contribution from the Pru's insurance business, which is calculated using the boardroom's cash flow projections. With numerous assumptions employed, there's obvious scope to be too optimistic. No surprise, though, that the Pru's directors believe the achieved profit basis to provide a 'more realistic reflection' of the company's performance. The only safe conclusion to be made is that if the dividend is to be cut, the accounts ain't too healthy. The moral of the story? Well, there's still an attractive growth story attached to Prudential and others involved in the long-term savings and investment field. But investors will find owning a broad spread of these businesses more rewarding than evaluating one or two particular favourites.