Market Report: Broker reignites dividend debate at BT

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The Independent Online

BT was in focus yesterday after Goldman Sachs waded into the debate about the possible threat to the company's dividend.

Moving the stock to "sell", the broker said the telecoms group, which touched a session low of 73.4p, down 4.8p, may be forced to axe the payout for the second half this year and for next year as it attempts to deal with the pressures posed by its troubled Global Services division, a forecast gross pension liability of up to £8bn, and high levels of leverage on its balance sheet.

Looking ahead to the company's full-year results next month, Goldman added that in its view consensus expectations of a 5-7p dividend were "far too optimistic".

The broker was more positive on Vodafone, which was also the subject of an upgrade at Morgan Stanley.

"As earnings forecasts stabilise, the stock should re-rate back towards historical multiple ranges from current tough valuation levels," Goldman said.

A late market-wide rebound helped BT to pare earlier losses, and at close the stock was 1.6p firmer at 79.8p. Vodafone closed at 128.2p, up 5.45p.

Overall, early strength on Wall Street helped the London market to recover from a lacklustre start, with the FTSE 100, up 29.4 points at 3,955.6. The FTSE 250 was also strong, gaining 167.1 points to 6,541.

Investors on both sides of the Atlantic heaved a collective sigh of relief after the latest reading on the Institute of Supply Management's index of US national factory activity came in better than expected.

Although still below 50 – which indicates contraction in the manufacturing sector – the index rose to 36.3 in March, slightly above a median market forecast of 36.

Retailers continued to draw steam from Marks & Spencer's better-than-feared update earlier this week, with Home Retail Group advancing to 242.25p, up 7.8 per cent or 17.5p, and Next climbing to 1,410p, up 6.5 per cent or 86p.

Panmure Gordon did its bit to aid the advance, telling clients that despite some strong performances since the beginning of the year, it was not yet tempted to take profits.

"When the recession ends, we expect capacity will have been reduced and that the survivors will do very well, even if the consumer's access to cheap credit is much diminished," the broker said, striking an optimistic note as M&S gained another 13.2p to 309.25p.

The banking sector was a mixed bag, with HSBC rising to 410.75p, up almost 4 per cent or 15.7p, as traders predicted a strong take-up of the lender's rights issue offer, which closes at the end of this week.

Lloyds Banking Group, on the other hand, was broadly unchanged, firming a slight 0.3p to 71p after JP Morgan slashed its target price for the stock to 14p from 67p. For Barclays, which was 9p ahead at 157p, the broker upped its target to 115p from 114p; for the Royal Bank of Scotland, which was 0.6p firmer at 25.1p, it scaled back its target to 17p from 25p.

Elsewhere, Thomas Cook underperformed, losing 4.5p to 235.5p after Morgan Stanley advised clients to switch to the rival tour operator TUI Travel, which gained 4.7 per cent or 10.75p to 239.5p. "We are increasing 2009 forecasts for companies following solid trading this year, but we remain below consensus on Thomas Cook in 2010, due to its higher exposure to the tougher Scandinavian market and as it is already approaching peak margins," the broker said.

On the second tier, hopes that the Government may step in to help rail groups that struck franchise agreements when passenger numbers were strong boosted the likes of National Express, which surged to 187p, up almost 23.2 per cent or 35.2p, and Stagecoach, which climbed to 131.75p, up 9.7 per cent or 11.7p. Rail operators are seen as increasingly vulnerable to the recession as higher unemployment cuts the number of people commuting to and from work.

Also on the upside, Regus, the office space provider, was 2.75p ahead at 76.25p after UBS upped its target for the stock to 72p from 48p, saying that although this year was set to be weaker than 2008, the company should hold up better than it had initially expected.

Among smaller companies, Innovation Group, the specialist outsourcer, suffered a bruising decline to 4.88p, down almost 32 per cent or 2.3p, after announcing the cessation of talks regarding a possible offer from Carlyle, the private equity group.

The news prompted Panmure Gordon and Altium Securities to downgrade the stock to "hold". Evolution, which placed its 7p target price under review, said that at this stage Innovation was "not an investment grade story".

"This is the second time apparent bid interest in Innovation has come and gone, with several private equity parties supposedly interested before Christmas at prices ranging between 15-20p a share," the Evolution analyst Roger Phillips said.

"The bottom line cash generation of the stock has been awful for [2008] and we are not fully convinced the balance sheet is safe despite the net cash position (note recent reports state that Carlyle believed the business needed a £10m cash injection)," he added.