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JLT may be forced to cut dividend, says analyst

UK broker Jardine Lloyd Thompson Group plc may be forced to cut its dividends to shore up its balance sheet in a declining rating environment, according to a Merrill Lynch research report issued today (9 May).

Merrill Lynch predicts that JLT may reduce its dividend from a forecast 20.5p for 2005 to 13p because the current rate is not sustainable with heightened working capital demands from the Financial Services Authority for brokers, together with a significant pensions liability of £73mn on the balance sheet.

According to the research note, JLT has goodwill of £157mn and shareholders’ funds of only £52mn. “It is not unusual for a people business to be so heavily reliant on goodwill but we think JLT’s exposure is perhaps on the high end,” explained the report. It continued: “Of our listed broker universe only Willis had negative net tangible equity of $127mn at end 2004. However, our US colleagues also expect Willis to amply cover this through retained earnings of $267mn in FY05.”

The report also noted that JLT’s management believe that the FSA’s new working capital requirements will also mean an additional £55mn of capital for Risk Solutions. In addition, the company may need to make performance payments later this year of up to $25mn in respect to its HCC acquisition, together with its acquisition of a Latin American business.

“We accept that none of the above points are really new,” continued the research note, “However, we think the continuation of poor trading trends for insurance brokers in general and JLT in particular is adding to the pressure,” it continued.

Merrill Lynch has maintained its “sell” recommendation on the company, together with its “fair value” price of 283p. It points out that if the dividend is cut, it is likely to reduce the group’s price/earnings multiple which is currently above average at 13.8 times 2006 estimated earnings.

JLT’s shares closed down 2.2 percent at 346.25p today.

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