Pru cut 'could open floodgates'

SPECULATION that insurance company Prudential will unveil a hefty cut in its payout at its half-year results next week has cast a shadow over the market.

It would be a serious blow for Jonathan Bloomer, Pru's chief executive, who would suffer the ignominy of being the first boss at the company to cut payouts since 1914.

He might also earn a wigging from his own investment director, Michael McLintock, who warned Britain's leading companies in a letter last autumn of the importance of maintaining their dividends. Against a backdrop of lower inflation and reduced investment returns, McLintock wrote: 'It can be expected that dividends will become an increasingly significant component of total return.'

Indeed, Bloomer might decide that raising extra capital through a rights issue would be more politic than scything the divi.

The insurance sector has been particularly hard hit because of its immediate exposure to stock markets. There is speculation that Legal & General, which reports results on Thursday, will announce a cut. If the Pru and L&G do take an axe to divis, others will find it easier to follow suit. Those tipped to cut include Friends Provident and Lloyds TSB, owner of struggling life assurer Scottish Widows.

Others are feeling the pain. At Cable & Wireless, ITV group Carlton and shipping company P&O, dividends are uncovered by forecast earnings. There is a fat 6.3% dividend yield at supermarket group Sainsbury - but the payments are being made out of reserves, not operating cash flow.

Several stock market titans, including BT, Marks & Spencer and Aviva, have already pushed through swingeing cuts in their divi in the past couple of years, though they have resumed payouts from a lower base. British Airways suspended dividends in October 2001 and there is no indication of when it will bring them back. Industrial giants Marconi and Invensys used to be faithful payers of dividends, but have stopped altogether. Even the Queen's stockbroker, the blue-blooded Cazenove, cut its divi by 60% this month.

Tony Nutt, who manages the Jupiter Income Fund, says: 'I am concerned about some specific companies where dividends have had to be cut to rebuild ravaged balance sheets.'

The weakness of the dollar has been another menace to dividendhungry investors. That is because of the vogue for declaring payouts in greenbacks among big companies such as HSBC and BP, which between them account for 20% of the income from the FTSE 100.

Dividends fell out of fashion during the tech boom when punters were only interested in fast capital growth. But when share prices are falling, the dividend becomes more significant. And in the aftermath of accounting scandals, it is reassuring for investors to see some real cash.

Cuts in divis are a blow for company pension schemes, which have collectively fallen into a £150bn deficit. Francis Fernandes, partner at Lane Clark & Peacock, warns: 'When lots of companies scale back on dividend payments, pension funds may find they need to sell shares to meet pension payments.' Let's not overdo the gloom. Most companies have defied falling markets and have either valiantly increased or sustained their dividends.

But the current scenario shows that investors should never underestimate the importance of the divi. As Nutt says: 'The dividend says more about the prospects and the current health of a business than pretax profits. 'The cash you get in your hand is the most important thing. Everything else is just speculation.'