Corporate profits in the U.S. rose by $25.1 billion in the final quarter of 2002 to stand at $796.1 billion, highlighting a shift in corporate mentality in the wake of the equity market meltdown, RBC Financial Group says.

In a report by John Anania, assistant chief economist, the bank also says the prospects for U.S. corporate profits this year are more positive than negative.

“An eventual end to hostilities in Iraq should bring about a reduction of risk premiums built into everything from equity to commodity prices. Economic activity will respond positively to such developments and, if the 1991 Gulf War is any indication, economic indicators won’t take long to confirm such an improvement. Lower oil prices, an upward bounce in consumer confidence and a rise in sales will combine with low inventory stocks to push up production and profits in the remainder of 2003.”

The report says after falling by 7.2% in 2001, profits rose 7.6% in 2002, practically reversing all of the declines seen at the worst of the current economic downturn. “Profitability has moved well off the lows of 2001.

“The details of today’s profit report highlight a shift in corporate mentality in the wake of the equity market meltdown.”

RBC also notes that $444.3 billion in dividends were paid in the fourth quarter of 2002, which is 18% above the average for 2000 just before the equities crash. All figures are U.S. dollars.

“Undistributed profits stood at $28.2 billion, a stunning 81% decline from the 2000 average. These trends, along with excess capacity issues in some industries, help explain why non-residential business investment remained subdued last year. Corporations are being very selective in the capital expenditure plans they currently undertake, preferring to assuage investor fears by paying higher dividends,” it finds.

The report says there is a key difference on the question of cash management by corporations that will reflect both increased investor confidence and additional profit gains.

“The ratio of undistributed earnings to dividends paid will reverse course and move well off its annual low of 4.1% in 2002. In fact, while still very low relative to dividends at this time, this ratio jumped to 6.3% in the fourth quarter of 2002 from 3.7% in the third quarter.

“Rising profits with a greater share being undistributed can only improve the business investment picture as 2003 progresses.”