City analyst calls for cut in Punch Taverns' dividend

Punch Taverns should cut its dividend payment to help pay off some of its debt, a City analyst said today.

Punch's shares have fallen sharply in value in recent months - and are 85 per cent down on their all-time high this time last year - as the City has become increasingly nervous about the group's ability to pay its debt, despite repeated reassurances from senior management.

James Ainley, an analyst with brokers JP Morgan, argued that fears of the likelihood of Punch coming to the market with a rights issue were "overdone".

He believes that "with careful cash management" and a dividend cut the UK's largest pubco can fund its £295m convertible debt repayment.

Ainley said that even with a dividend cut Punch could spend the next two years entirely focused on internal cash generation and debt repayment, although he believed the business "remains fundamentally cash generative and should steadily reduce its debt burden".

Nevertheless he argued that management needed to act by the full year results announcement in November.

"Although a potentially negative short term signal we believe that cutting the dividend would plug the gap and could create a relief rally if it secures the medium term financial position. Management remains confident that no action needs to be taken now."

JP Morgan was meanwhile cutting its forecast for Punch's profits in 2009 by 14 per cent.

Punch Taverns declined to comment on Ainley's research, although chief executive Giles Thorley has consistently maintained that the group's finances are in good shape and that neither a dividend cut or rights issue were required to strengthen its balance sheet.

Punch's shares were up more than 10 per cent this morning at 241.75p, after a similar rise yesterday.