Market Report: BT retreats on fears that dividend is at risk

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The Independent Online

BT retreated to an all-time low at the end of what was one of the worst weeks on record for the London market.

The stock closed 11.1 per cent or 9.3p behind at 74.1p amid concern about the company's dividend, which may be at risk as it tops up its pensions pot. Morgan Stanley said that while there was scope for substantial long-term benefits from cost-cutting at BT's troubled Global Services division, in the short term the shares looked vulnerable.

"We now consider £500m per annum a minimum top-up level (previously a maximum), with £750m a possibility if pension trustees take a more conservative view on deficit recovery. Either way, the shares still yield less than the sector, with cash breakeven at Global Services (currently losing around £300m per annum) still some way off," the broker said, pointing out that bigger top-ups were liable to dilute cash flow and put the final dividend at risk.

Overall, the FTSE 100 was broadly unchanged, gaining 0.8 points to 3,530.7 after a key US jobs report landed in line with market expectations. Despite staying firm, recent falls mean that the benchmark equity index is down about 7.8 per cent over the past five sessions – its sixth worst weekly showing on record. Morgan Stanley, which weighed in on the index yesterday, revised its 12-month target of the Footsie to 3,500 from 4,300.

Insurers continued to slide, with Aviva, which was down 33 per cent in the session before, slumping to another record low, down 14 per cent or 26.6p at 163.3p. Capital strength remained the concern around the stock, impacting market sentiment despite words of support from some analysts. Bernstein, for example, reiterated its "outperform" stance on the stock, arguing that current price levels were "extremely tough to justify as Aviva's (and the sector's) position is relatively robust under most likely scenarios".

"The main bear case is that the insurers, as levered bond plays, are extremely vulnerable to severe bond losses," the broker said. "Our counter-argument is that history suggests that spreads [which are supposed to indicate default risk] are a poor guide to future losses, and that the 200-400 basis points per year of sustained losses implied by current fixed income markets is extremely improbable."

The market was in no mood to listen, however, and besides Aviva, Legal & General was 6.8 per cent or 1.8p behind at 24.8p and Friends Provident retreated to 57.7p, down almost 5 per cent or 3p.

Among banks, Lloyds Banking Group gained more than 4 per cent or 1.7p to 42p as traders looked forward to an announcement on the lender's participation in the Government's asset protection scheme. The hopes overshadowed news from the ratings agency Standard & Poor's, which lowered its ratings for Lloyds TSB and Bank of Scotland shortly before the end of play.

Barclays was less fortunate, easing by just over 1 per cent or 0.7p to 64.8p, as Panmure Gordon's recent warning about the potential for bigger than expected writedowns continued to weigh on the stock.

Miners and oil issues rebounded as investors bought in on Thursday's weakness, with the Eurasian Natural Resources Corporation climbing to 376.25p, up 6.8 per cent or 24.2p, and Tullow Oil gaining 3.5 per cent or 25.5p to 735p.

Elsewhere, the FTSE 250 fell further away from the 6,000-point mark, retreating by 103.8 points to 5,831.5. Candover Investments recovered to 125p, up 14.9 per cent or 16.25p, even as new reports suggested it was considering winding down its existing funds.

There was no love for Brixton, the commercial property group which continued to slide, losing another 17.8 per cent or 4p to 18.5p as investors awaited news on its capital raising plans amid fears that the market may be losing any appetite for more cash calls. A string of companies, including Cookson, which was down 3.8 per cent or 0.5p to 12.5p, have already tapped shareholders for funds since the beginning of this year. Wolseley, 15.1 per cent or 25p down at a record low of 140.4p, became the latest business to join the queue with the announcement of a £1bn share sale yesterday.

In broker-driven news, National Express was 8.7 per cent or 17.75p weaker at 186.25p after Goldman Sachs lowered its estimates for the transport group. The broker also reduced its target price for the stock to 225p from 360p. "Given the company is close to its banking covenants, we now forecast lower capital expenditure and no dividend payment going forward," Goldman added.

Among smaller companies, FoaMasters, the Chinese foam-making business, saw its share price surge by more than 85 per cent or 9p to 19.5p after offering to buy back stock ahead of delisting from the AIM.

This is the latest in a string of recent delisting announcements. Like the others, FoaMasters cited the lack of liquidity in its stock as one of the factors behind the decision. The share buyback, which along with the cancellation proposal is subject to shareholder approval, will be conducted at a price of 23p per share.

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