Putting faith in Footsie's fortunes

INVESTORS have plenty to worry about this autumn with war clouds hanging over Iraq, Saddam Hussein making promises he might not keep and the US economy vulnerable to recession. But they can take some comfort in the trend of big-company profits and dividends. The Evening Standard's twice-a-year Business Day survey of Britain's top 100 companies listed in the benchmark Footsie index shows that 34 out of 60 which have reported results this year have lifted profits while 37 have boosted their dividends. Earnings have fallen at 26 but only four have cut divis.

Those dependent on foreign markets, such as insurers, engineers, hotel operators and companies in oil, mining, transport and the media have suffered some serious setbacks. But they have been outnumbered by consumer companies in the food, drinks, pharmaceuticals, tobacco, stores, building, property, packaging, household goods, utility and banking sectors which have raised profits.

This is a surprising and comforting picture after a series of shock profit warnings and signs of big companies in trouble last year. Nearly 60% of Footsie firms saw earnings fall in the second half of 2001. There also appeared to be a serious threat to dividends under the impact of a new accounting rule, FRS17, which meant showing the impact of falling markets on pension funds as they occurred.

The figures partly reflect moves in and out of the top 100. Many of the big companies in trouble, such as Marconi, British Energy and Railtrack, have long since left the elite index. So have most of the telecoms, media and computer services companies, which bore the brunt of last year's falling earnings, But our findings do fairly reflect the experience of the biggest companies in the land and do cover broadly the same companies as our spring survey.

The survey is also a fair reflection of the corporate sector as a whole, since it includes about 60% of the biggest companies by value and most of the top 10 companies in the land with a combined stock market value of around £500bn. These giants account for about a quarter of total British corporate profits.

It also ties in with a report on profit warnings this summer, which showed the number of alerts slowing sharply in the second quarter, and with analysts' macro forecasts.

Merrill Lynch equity strategist Khuram Chaudry said he is expecting profits to rise by about 5% this year and 7% in 2003 while dividends will grow by around 4% this year. But he points out that dividend growth is slowing to match falling cover and expects more dividend cuts early in 2003, based on full-year 2002 earnings.

The message of the survey is that there has been a shift for the better. Some companies have put their houses in order and others have recovered with a steadily growing economy. The impact of FRS17 on dividends has been deferred or companies have decided to tough it out longer, encouraged by an attempt by Government and accountants to phase out its impact. The latest trend in profits and dividends should do something to underpin share ratings in a nervous period for the stock market.

Average price-earnings ratios have eased from 31 at the market peak in 1999 and 25 a year ago to around 19 today and could fall another point or two if profits go on edging up, while the average dividend yield of about 3.25% could move to around 3.50%.