Bottom Line: Coats should not push its luck with scrips
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Your support makes all the difference.COATS Viyella, Britain's biggest textiles company, yesterday embarked on a second year of enhanced scrip dividends.
In principle, the practice of paying dividends in shares rather than cash is extremely difficult to justify. Coats, saddled with pounds 100m of unrelieved advance corporation tax, has had a pretty good try.
An enhanced scrip dividend equates to a mini-rights issue. In the worst case a company can use one to pretend it can afford to pay a dividend when it cannot.
Coats escapes this charge. Free cash flow in 1993 would have easily covered the payout. However, by using enhanced scrips Coats is still asking shareholders to pay for a dividend by diluting the value of their investments.
Using enhanced scrips means Coats is storing up potential problems for the future. More shares in issue means it will have to work harder to achieve growth in earnings per share.
In Coats' defence, an enhanced scrip releases the pounds 100m surplus ACT lying in Exchequer coffers, which could only be reclaimed otherwise by earning a lot more profits in the UK - a process that could take 10 years in Coats' case.
Coats also struck a constructive note by emphasising that the pounds 35m cash saved will be invested in the company's ventures in China and eastern Europe, and in acquisitions for the engineering division in North America.
In addition, of course, taxpaying shareholders get 50 per cent better dividend income.
Given the size of the unrelieved ACT surplus, Coats can be forgiven for using this objectionable device. But the company should take the 7 per cent fall in its share price yesterday as fair warning. It should not push its luck.
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