CRH and its dividend is tied to economic fortunes of US
Published 25/08/2010 | 05:00
Irish shareholders are having no luck in these difficult times. Just when there were tentative signs that Europe might enter a period of sustained growth, the globe's other key market, the US, struggles to stage a meaningful recovery.
Yesterday CRH, Ireland's biggest and arguably most important company, was the victim of very bearish sentiment towards the US economy.
The building materials group suffered its biggest share price drop since 1988 as the market took fright at the group's profit warning, mainly caused by problems in the US housing and construction markets.
With CRH now making up more than 30pc of the ISEQ, it was no surprise that index took a hammering, tumbling 5pc from early on in the day.
CRH in many people's eyes is the ISEQ these days and any problems with CRH are likely to rebound on to other stocks and, in time, on the Irish economy.
This is because of the heavy presence of CRH in Irish pension portfolios, although this damage is somewhat limited because CRH, for now, is keeping its dividend at 18.5 cents a share.
But CRH, because of its size, is also a global bellwether and markets from London to New York were yesterday led in part by the very downbeat comments issued by CRH in its outlook for the remainder of the year.
While chief executive Myles Lee wasn't prepared to declare the arrival of a double-dip recession the US, he said economic indicators from the US continued to be very negative.
This theme was confirmed later by official statistics showing that sales of existing US homes had plunged by a record 27pc in July. Sales of homes earlier in the year had been artificially bolstered by a tax credit from the Obama administration.
Once taken away, the market has slumped badly and even companies like CRH have been caught in the aftermath.
Until there is a sustained recovery in the jobs market the US economy will remain sluggish, leaving CRH struggling to squeeze an improved performance out of its US materials business.
The only consolation to CRH shareholders, and it's a small one, is that CRH is not the only company in its sector struggling. Rivals like Lafarge, Holcim and Saint Gobain have also been struggling and any company with a large presence in cement cannot boost earnings substantially except through cost reductions.
Ireland and Spain are also markets holding CRH back, but it's unlikely to exit either, despite the current travails.
Secret of success
The secret of CRH's success over the last decade has been geographical diversity, and while its big US exposure is arguably a negative at present, the company's style is not to cut and run because of a temporary economic downswing, however severe it is.
But can it get worse for the company? It certainly can. Yesterday City analysts said CRH might have to cut its dividend if the 2011 outlook deteriorates further. This again will depend heavily on the US economy, which is currently in a very uncertain phase.