Rewarding investors with share buy-backs rather than dividends is a luxury only cash-rich companies like Reuters and GEC can afford. LucasVarity has set out to do it weighed down with net debt of £462m (78% of shareholders’ funds) and the City doubts it can finish the exercise.
The move put pressure on the share price after last week’s results.
In 1995 there was a 7p cash dividend. But the merger which formed the group last year has created a share register with differing aspirations. Americans (35% of the total) prefer buy-backs and British and other shareholders prefer dividends.
Victor Rice, LucasVarity chief executive, is compromising with a 4p cash dividend at a cost of approximately £60m and a planned £90m share buy-back programme. He started it last week, buying in 10 million shares for close on £20m.
Rice talked of cutting gearing sharply by making £100m of disposals and freeing £140m of working capital. But a £90m share buy-back, and around £120m this year of the £250m provisions the company is making for restructuring, would eat up most of that.
Cutting gearing via internal cash generation looks a non-starter as this is not the firm’s strong card. A tough trading climate also does not help the scenario: a big chunk of the company’s business is with the automotive industry whose European players reported a 3% fall in sales in March.
`LucasVarity is between a rock and a hard place,’ one analyst said. `Given the deteriorating trade climate and its stretched balance sheet, I don’t see it getting much further with the buy-back.’