Dividend is safe despite British Steel’s pounding

Profits forecasts still falling, but cash pile reminders stop decline in share price

The strong pound is playing havoc with British Steel’s business in Continental Europe. The City has slashed its profits forecasts but stockbrokers say the dividend is safe this year and next.

There was speculation that it might be cut with some brokers’ forecasts for 1997-98 indicating a maintained (10p) dividend would not be covered by earnings.

But the rumours were quashed at the annual dinner for city analysts hosted by British Steel chief Sir Brian Moffatt and his top brass. They were reminded of the company’s big cash pile (£700m) and its policy of targeting two times earnings cover for dividends over the industry’s cycle.

In the eight years since privatisation the company has paid dividends totalling 49.5p, while earnings for the period have topped 120p.

Last year was the peak of the cycle when British Steel made £1.1bn and the 10p dividend (an increase of 33%) was covered almost four times by earnings.

The reminders halted a long fall in the shares, down 25% from their year’s high and which hit a new low on the dividend rumour.

City forecasts for the current year to March have been shrinking for months and – driven by continuing flat steel prices and the adverse currency exchange – have been heavily cut since the New Year.

Estimates of earnings cover this year for a 10p dividend range up to the 1.6 times of house broker, UBS, which now looks for £500m pre-tax. But its forecast for next year is grim – profits halved again to £250m and earnings of only 7.5p.

For 1998-99, UBS pencils in recovery to £400m and earnings of 11.6p, again covering a 10p dividend. Through all three years, UBS forecasts an unchanged 10p dividend.

Broker Merrill Lynch is also down to £500m for this year and £280m for next when it looks for earnings of 8.6p. Merrill has revised its profits estimates for all the principal UK engineering exporters to take account of the pound’s strength, and concluded that the adverse impact across the board will not exceed 5%.

British Steel exports half its production with 30% going to Continental Europe where Germany is the leading producer and market. Steel prices are quoted in deutschmarks and the problem for British Steel is the 20% fall in the mark’s value to around 2.67 against sterling over the past year.

That takes heavy toll of European earnings on conversion to sterling. But analysts are equally concerned about potential major loss of market share as British Steel loses the competitive pricing advantage it had against Europe a year ago.

David Bevan of broker Credit Lyonnais Laing said British Steel will be `a follower rather than a leader in pricing’. Bevan, whose profits forecast for next year has fallen from £880m to £380m since last spring, has the shares on `hold’, though he concedes their yield is attractive at around 8.5%.

NatWest Securities, is worried about dividend prospects later in the cycle and has the shares on `sell’.

Meanwhile, the hoped for recovery in steel prices has yet to emerge. British Steel describes the picture as `very mixed’, though it says prices have bottomed out. `This quarter will remain patchy, but we expect prices to move up from April,’ said a spokesman.