Market Report: Struggling Debenhams 'may cut dividend'

Merrill Lynch resumed coverage on Debenhams yesterday, forecasting a fall in earnings and highlighting the prospect of a cut in the department store's dividend.

"Other retailers' margin-protection strategies are likely to lead to increasing competition, which, coupled with a weak consumer [environment] and inflationary pressures, leads us to believe [that] 2011 earnings will 16 per cent below forecast 2008 earnings," the broker said. It set an "underperform" rating on the stock and noted that, without an earnings uplift from trading, the pressure posed by the company's debt-laden balance would continue to weigh on its share price.

"We think it would be sensible to cut the dividend, given the result of our debt analysis," Merrill added, predicting a dividend of 4p – 37 per cent lower than last year. The assessment held the stock back, taking it to an intra-low of 46.25p, down 2.5p. But a late afternoon rally helped the stock overcome the impact of Merrill's comments and Debenhams closed up 2.25p at 51p.

Overall, the FTSE 100 gained 57.14 points to close at 4,959.59, while the FTSE 250 edged up 26.18 points to 7,914.39. The benchmark index was aided by hopes that the US bank bailout bill, which was derailed by the House of Representatives on Monday, might find support in the Senate, which was due to consider the proposal after the end of play in London. Speculation that the Bank of England was gearing up to cut interest rates also boosted sentiment, underpinning gains in parts of the retail and housing sectors.

On the FTSE 100, HBOS gained 21 per cent, or 25.7p, to close at 148.1p after Prime Minister Gordon Brown said he was confident about its planned merger with Lloyds TSB. Analysts, including Credit Suisse, also weighed in, anticipating the deal to go through given the given the "considerable regulatory and political pressure" and the cross-shareholdings between the banks. "An analysis of the top 20 shareholders of each bank shows that 25 per cent of Lloyds TSB shareholders have equally large percentage holdings in HBOS," said Credit Suisse.

"On the assumption that HBOS is worth little in the absence of a deal, this could sway these holders to vote the deal through."

Lloyds was also firm, rising 10.38 per cent, or 23.5p, to close at 250p, despite JP Morgan predicting that, after combining with HBOS, it might have to make additional write-downs on a pre-tax basis of up to €5.7bn. Royal Bank of Scotland failed to make the most of the sector rally, gaining just 1p in the final minutes of trading to close at 180p.

Traders blamed the read-across from the problems at Fortis, and also concern about its ownership of the Northern Ireland-based Ulster Bank. Collins Stewart analysts said: "We anticipate depositors withdrawing funds from non-guaranteed banks (such as RBS's Ulster Bank, which does not appear on the Government's list even though it is a major high street clearer in Ireland) and moving to locals."

There were also rumours of a possible bid. Market speculation suggested that HSBC was gearing up to unveil an offer for RBS, which has lost more than half its value over the past year. The talk was played down, however, and HSBC gained 21.25p to 922.25p, banking gains as investors awaited the bailout vote in the US Senate.

In the mining sector, Xstrata abandoned its bid for Lonmin, sending the platinum miner's stock to 1,813p, down 20.27 per cent or 461p. Xstrata said it had acquired another 14.2 per cent stake in Lonmin, taking its interest in the business to about 25 per cent. Cazenove said in a note: "This is sufficient to block a friendly counter bid via a scheme of arrangement and, as we saw with Flaconbridge, gives Xstrata a significant advantage in the face of another party launching a hostile [offer] which, in turn, we would think is highly unlikely now."

Xstrata, which has underperformed its peers since approaching Lonmin in August, swung to a high of 1,912p on the news. But a sharp fall in the price of copper overshadowed the move and the stock closed down 33p at 1,683p.

On the FTSE 250, housing shares shed recent gains after St Modwen Properties said the market was still deteriorating. Its price fell by 9.66 per cent, or 28p, to close at 262p. The read-across took Persimmon back to 385.25p, down 3.26 per cent or 13p, despite continued speculation about an emergency interest rate cut. Barratt Developments, although up 4.75p at 109.5p, was well clear of its intra-day high of 121p.

On the upside, Punch Taverns was the strongest FTSE 250 company, finishing 25.5p, up 18.89 per cent, higher at 160.5p, after it offered to buy £93.5m of outstanding bonds to manage its cash resources. The move follows mounting concern about the pubs group's debt-laden balance sheet.