Recovery needs BP's fuel

THE share rally ran out of puff yesterday to remind us that the bear market is not yet over. But as the dust clears after the huge falls of the past month, we have the chance to take a calm look at the prospects for investors.

Reports from two of Britain's biggest companies, BP and BAT, bring us back to basics. Neither is going full steam ahead - BAT's tobacco sales are falling, and BP's profits have halved from the eyewatering levels of the last two years. But both are churning out cash, and sharing it with investors in rising dividends.

Even half of what BP made in 2000 and 2001 is still a sackful. Underlying first-half profits were £2.4bn ($3.76bn), with an improvement from £1bn in the first quarter to £1.4bn in the second. Chief executive Lord Browne is lifting the quarterly dividend from 5.75 cents to 6 cents (3.875p).

BAT's Martin Broughton lifted payouts 10% to 10.7p after six-month profits topped £1bn.

The half year was no picnic for either company. BAT's Broughton had to contend with wild swings in currencies, the effects of smuggling, and the unending stream of US lawsuits. Browne had a steep fall in US gas prices, which had been making BP a fortune, and the worst markets for chemicals in a decade.

He also had to set aside a one-off £225m ($355m) for Gordon Brown's North Sea tax hike, which will cost £127m a year thereafter. Mind you, the UK petroleum revenue tax charge dropped from £373m to £153m, so the taxman is not having it all his own way.

BP's big move into German petrol stations this year was not as well timed as its spectacularly successful dash into US gas just before prices rocketed. But it has a string of deepwater oil projects coming on stream, is pushing into China and appears to have put its nightmares in Russia behind it. A company this size which lifts oil output 5% and cuts costs 6% is obviously doing something right.

Browne said: 'It was a turbulent period but it is our job to run the business robustly and not be fazed.' That is exactly what investors want from big companies and is the best long-term reason for buying shares rather than bonds.

BAT is yielding just under 5%, BP close to 4%. Both companies have a good record of growing dividends.

That is just as well. With technology deep in gloom, insurers under a cloud and go-go growth stocks under the accounting microscope, it is left to the 'old reliables' to drive stock markets forward.

The last week's rally is as welcome as the sunshine, but neither may last long. First hopes in the US were that George Bush's August 14 deadline for company bosses to declare their accounts in order would clear the air. In practice, as some appoint new auditors and others institute reviews, shocks could be spread over several months. Autumn may bring an attack on Iraq, with all the resulting uncertainties.

The Dow's near 1,000-point surge leaves it once again looking overvalued. The Footsie, which has bounced from 3625 to 4180, is not quite such a bargain. But if the whole market no longer looks cheap, at least some of the better companies do.

Banks bashed
THERE are some sensible proposals from the Commons Treasury Committee, the latest in a long queue to scrutinise banks in the last two years. Undoubtedly, credit card charges should be simpler and more transparent, and it should be easier for small businesses to change banks.

On these issues, the committee's recommendations are welcome. Some of its other ideas are more contentious. The notion of banks sharing branches in remote areas is appealing, but so was car sharing, once hailed as the solution to traffic congestion. Home sharing might solve the housing shortage, too, if only people would agree to it.

The regulatory reports on banking are beginning to pile up. The one effective sanction is free competition, which happens when there are plenty of lenders and switching is easy.

The watchdogs should focus on these, and let markets do the rest. One simple move would be to extend the new automated switching system, which is beginning to work for personal customers, to small businesses. Once the exit door is open, customers tend to be treated better.

After that, the watchdogs should stand back and give the changes a change to work. But will they?

The old joke goes: Never complain about the stupidity of bankers - if they were any smarter, you'd starve. I have an uneasy feeling that one day we will be saying something similar about regulators.