Essential oil is a real profits rise

THOSE still puzzled by Wall Street's sell-off should consider a remarkable statistic, uncovered by Straszheim Global Advisors in the US, but curiously, little covered in the financial media.

Straszheim has calculated that US companies' dividends in the last quarter of 2001, and the first quarter of 2002 exceeded after-tax profits. The margin is small, but that is not the point.

Not the least fascination of this figure is that for years many of us have been commenting that the US dividend yield was very small - certainly too small to make any sense of share prices on Wall Street. Never mind, 'experts' would insist. Capital growth was the thing.

Now, despite collapsing share prices, we find in an about-turn that dividends are actually too large!

The extent of the change can be seen by the fact that, between 1980 and 1999, payouts averaged about 60% of profits. Now it's a figure of over 100%. Clearly, it will need a hefty rise in profits if payouts are to fall to what are normally seen as safe levels.

Until recently, stock market strategists were predicting a substantial recovery in earnings - 10%, maybe 15% was a common prediction. Firms have been cutting their workforces and making other economies.

However, investors have reason enough to doubt, if not scorn, analysts' predictions these days. That apart, these figures are put at risk by the new and rising fears about profits inflated in the past by aggressive accountancy - to say nothing of sheer, corporate criminality.

If the total profits of corporate America do not recover sharply, then many firms will have to cut dividends. And there is nothing like dividend cuts to send share prices reeling. Even if profits do recover, it will still leave too narrow a gap between earnings and dividends to allow for a reasonable degree of capital spending.

It is the absence of this that is seen as the missing link in the supposed economic recovery in the US. Raising new capital for investment outside businesses' own resources must be difficult, if not impossible in the present climate. In short, the last two quarters' unsupported dividends are a very bearish signal for Wall Street and other markets, including our own.

Heavy heart

THE dollar's fall, largely due to foreign investors' growing aversion to Wall Street, is not a blessing for the euro. The European Central Bank has welcomed the ' improvement' but perhaps with a heavy heart. Real gross domestic product in the EU grew only 0.2% in the first quarter, despite net exports rising by 0.7%. Germany has seen an impressive rise of 12% this year.

But there is a close correlation, over recent years, between foreign orders for German industry and the strength of the dollar, relative to the euro. Orders look likely to fall sharply. The EU too is suffering from poor capital investment. Gloom among consumers does not help either. The quarterly figures for confidence among retailers have fallen to the lowest level since 1994.

Overall EU growth of about 1% for the eurozone this year would seem to be on the cards. This threatens to undermine the Stability Pact as tax revenues fall. Portugal is breaching the limits, France and Germany are in increasing danger of doing so. This could damage the euro itself - or so German industry must hope.