Investor/An insider's guide to the market: Deflation seems to be the macroeconomic theme gaining increasing force recently. Mr Alan Greenspan, chairman of the Federal Reserve, recently stated that falling inflation posed a serious threat to the US economy.
In Japan, prices have been falling since 1995 and continued deflation seems to be in prospect for the economy. This is reflected in the government bond market where 30-year fixed-rate Japanese government bonds are yielding less than 1 per cent per annum. Each day, the prospects grow for further cuts in short-term interest rates in Europe and the US.
For firms, this environment is challenging as achieving consistent sales growth becomes difficult. In this context, investors in the Irish stock market should be pleased with recent results announcements from Bank of Ireland and industrial holding firm DCC. In the year to end-March 2003, the bank performed well as it generated a 6 per cent rise in profits and a 12 per cent rise in its dividend payment per share. Over this period, the bank was in the news for other reasons. It appointed a new chief executive, Mr Mike Soden, who quickly grabbed the headlines with his overtures regarding a merger with AIB and an aborted takeover attempt of Abbey National in the Britain.
Despite high-level market scepticism over these proposals, the bank's shares have outperformed the European bank sector by 17 per cent in the 12 months to end-March 2003.
Its superior revenue growth, tight cost control and strong asset quality were not overshadowed by the aborted merger and acquisition activities.
Indeed, more recent statements from Bank of Ireland's management indicate it is now focusing on organic growth and is unlikely to attempt further large-scale mergers and/or acquisitions. The market has welcomed this clarification as any large-scale banking acquisition usually involves a high degree of risk.
Without any major acquisition, the bank's balance sheet will continue to strengthen. The bank's return on equity has been sustained at 20 per cent or more for many years and provides the bank with considerable flexibility in terms of rewarding its shareholders, either through increased dividends and/or share buybacks. Despite prospects for slower growth in Ireland and the Britain, the bank seems to be well positioned to continue to outperform international peers.
DCC, a medium-sized industrial holding firm, also recently reported financial results to end-March 2003. It produced earnings growth of 13 per cent and raised its dividend by 15 per cent. The sectors the firm operates in include energy, housebuilding, food, information technology and healthcare. Housebuilding, energy and food were the better-performing sectors in the period under review. In construction, Manor Park Homebuilders produced a rise in profits as house completions rose by 35 per cent to 500 units.
The energy sector produced a strong underlying performance that was augmented by an initial contribution from the recently acquired British Gas liquified petroleum gas operation. Healthcare was weak due to the loss of some key customers, while IT achieved modest growth in a difficult environment. DCC's activities in the IT sector are primarily involved in the distribution of products rather than in research and development.
DCC's balance sheet is in a strong position with net cash of €20 million that leaves the company well placed for ongoing organic and acquisition-based growth. Over the past 10 years, the group has produced an impressive compound annual growth in adjusted earnings per share of 18.8 per cent, enabling the company to grow its dividend payments consistently. In the environment that is likely to pertain in coming years it is most unlikely the company will repeat such a high compound annual rate of growth. But solid growth in earnings and dividends seems assured over the medium term given DCC's strong balance sheet and diverse operations.
At its current share price, the shares are trading on a price-earnings ratio of less than 10 times earnings which seems seriously to undervalue DCC's proven ability to generate consistent growth in earnings and dividends. Bank of Ireland and DCC have financial strength and good market positions in their respective sectors and are examples of shares that offer investors attractive returns even in a slow growth environment.
