A tough life for Lloyds TSB

LLOYDS TSB may have given up trying to be a growth stock some time ago, but it has in recent years attracted a following because of big dividends. The group's shares yield a juicy 5.5%. But Lloyds is no longer the profit machine it once was. Indeed, the group may find it a sweat even to maintain its existing dividend.

The group's Achilles heel is its big life insurance operation, which is exposed to equity market valuations through its investment portfolio. This has been battered as markets have slumped.

When share prices fall, insurers should set aside capital to cover future benefits to policyholders. The worry is that in a prolonged bear market Lloyds' life business could devour significant chunks of its balance sheet reserves. It is not as if Lloyds has so much surplus capital it can afford to take the risk.

Its capital ratios are no more than adequate, and it is not augmenting them fast. Last year it earned £2.6bn after tax and negative investment return. It paid dividends of nearly £2bn - skimpy cover of about 1.3 times. Banks can only grow their businesses if they retain capital. And if Lloyds continues paying bigger dividends off a depressed profit base its revenues will stagnate. Perhaps this is something for new finance director Philip Hampton, to ponder. He has just been through a balance sheet crisis at British Telecom. That has probably taught him the virtue of conservative financing. He should cut Lloyds' payout.

Lastminute wins popularity with takeover story

LASTMINUTE.COM says its business model is about matching supply and demand. However, despite a 20% increase in the supply of lastminute shares this year, its share price has doubled. Is this a late revival of wacky internet economics?

On the contrary. Lastminute is rapidly demonstrating that the old economy lives. After all, it sells the same products as many other travel shops. Doing that enabled it to break-even in ebitda (earnings before interest, tax, depreciation and amortisation) terms in its core markets last quarter. Investors have real hope its reserves will see it through until cashflow turns positive next year.

Lastminute is also developing a taste for corporate aggression. In April it bought a competitor, Travelselect. In early June it invested in 20% of German online travel agent LCC24. And it has just repeated the trick with DGL, the parent company of Travel4Less.

Those acquisitions explain that increase in the supply of shares. Lastminute has protected its cash by settling them all in paper - except for a cash element of the Travel4Less deal that has been financed by issuing new shares. But the economic story behind them has been strong enough for investors to swallow the dilution risk.

Lastminute is trading at a 2004 price-earnings ratio of eight according to Goldman Sachs' forecast, which is far from racy. If its operating performance keeps reassuring investors it is on track, lastminute's current 90p plus share price may even have some upside left in it.

Employment trends

HOW hard are investment banks wielding the axe on their hapless employees? The Thomson Extel Survey, an annual rating of analysts, may provide a clue. The survey itself is growing in scope, so it should not be seen as a scientific guide to employment trends. That said, a study of two hard-hit sectors is still revealing.

There are 412 European banking analysts - a fall of only 2% over the year, despite a 7% decline in bank stock prices. Even worse, there are still 380 telecoms analysts. That's a drop of only 15% compared with a sickening 41% collapse in share prices. The ranks have been swollen by former internet analysts re-badging themselves as telecoms experts. Even so, it looks as if that axe will be sharpened again.

Hugo Dixon is Editor of www.breakingviews.com