UK: Bumper dividends, bumper debt.

UK: Bumper dividends, bumper debt. - That annual payout could lead to more than growing pains in the future.

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Last Updated: 31 Aug 2010

That annual payout could lead to more than growing pains in the future.

Bashing the banks is all the rage right now - and it has its place - but too many companies have only themselves to blame for the interest they're struggling to service. A survey completed by P-E International's Dennis Henry shows that, with the recession eating deep into profits, they have hiked up dividends, diminishing the income retained to fuel growth. A quick dash to the black horse provides temporary relief, but swallows up subsequent profits and the cycle continues, with debt piling up.

Take Central Television, currently basking in the glow of its successful gamble for the Midlands in the recent franchise fights. Between 1987 and 1990, Central's pre-tax profits nearly halved, but dividend payments grew by 34%. The latest dividend represents 65% of its profit before tax (PBT). On this sort of showing it's no surprise that retained profits are down, and borrowing up, by 800%.

The newly disenfranchised Thames TV has even bigger problems. The last four years make for rueful reading. Despite a drop in pre-tax profits of 64%, Thames hiked dividends by 25%. Borrowing has escalated by 569%, which is hardly to be wondered at when nearly four-fifths of last year's PBT went into shareholders' pockets.

At Reed International, an almost 9% drop in pre-tax profits over the last four years led to lavish dividends - up by 50%. It's not just the TV listings battle which has driven the hard-pressed publishing company to increase its borrowings by almost 600%.

Just as the media men have been paying out more than the figures seem to warrant, the construction industry has also been bulldozed by institutional investors. Over the last four years dividends at property developer Crest Nicholson have grown by 68%, in inverse proportion to pre-tax profits.

Wood products importer Meyer International managed a marginally better result, with dividends up by 76% in the same four years which saw PBT decline by 43%. Borrowing for the period rose by 403%.

Beazer, meanwhile, awaits reconstruction in Hanson's hands. Its collapse has more to do with debt which it incurred in America. Even so, Beazer increased dividends by nearly twice the rate at which it raised profits.

Beating up on the banks may be in fashion, but it's time to face up to the fact that borrowing is no substitute for saving on the annual handout. Companies which fail to take the dividend bull by the horns will only bring themselves down. And that does no service to anyone, investors included.

BIG DIVIDENDS PAID FOR BY INCREASED BORROWING

Company A B C D

Central 790 34 -48 -814

Crest Nicholson 662 68 -66 -124

Reed Intl 597 51 -9 -77

Thames TV 569 25 -64 -178

Rank Org 469 125 50 -20

Meyer Intl 433 76 -43 -64

BPB Industries 403 34 -50 -77

Beazer 397 78 46 -65

Key

A - Increase in borrowings (%)

B - Increase in dividends (%)

C - Increase in PBT (%)

D - Increase in retained profit (%).

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