Punch scraps payout as sales fall

A glass of beer is handed between pumps at the Great British Beer Festival at Earls Court in London, August 1, 2006.

LONDON (Reuters) - Britain's biggest pub company Punch Taverns (PUB.L) scrapped its year-end dividend as it fell victim to declining sales in pubs, sending its shares and others in the sector sharply lower.

Punch, which last year paid a final dividend of 10.2 pence per share, said on Wednesday it made sense to retain cash to bolster its balance sheet rather than make a payment to shareholders.

Pubs are being hit by last year's smoking ban, rising costs, declining consumer spending and cheap alcohol offers in supermarkets -- a trend highlighted on Tuesday when , Greene King (GNK.L) reported a decline in like-for-like sales.

In a statement on its fiscal year ended August 23, Punch said like-for-like sales at its 7,560 leased pubs fell 3.4 percent in the year to August 23, with comparable sales at its 864 managed pubs down 3.3 percent.

It said the priority for the use of its cash is to support the repayment of its convertible bonds. It is required to repay a 295 million pounds convertible bond in December 2010.

Shares in Punch Taverns, which underperformed the FTSE All Share Travel & Leisure Index .FTASX5750 by 50 percent since the start of the year, were down 16.8 percent at 263-1/2 pence by 12:15 p.m..

That gave the business a market value of just over 700 million pounds, compared with the 4.96 billion pounds total net debt Punch had at the time of its interim results in March.

Elsewhere in the sector Enterprise Inns (ETI.L), Whitbread (WTB.L), Mitchells & Butlers (MAB.L) and JD Wetherspoon were down between 5 and 14 percent.

Blue Oar Securities analyst Mark Brumby said Punch may have been forced into scrapping its dividend to avoid the risk of breaching bond conditions.

"Whether the passing of the dividend is reactive to a breach or proactive in seeking to head one off is not yet clear. We are drawn to the latter and would suggest the group is correct in retaining cash in the business," he said.

SHAREHOLDER SUPPORT

In a telephone interview Chief Executive Giles Thorley denied pulling the dividend was related to any immediate threat of breaching bond covenants. "No ... that's not the basis," he said.

Thorley said major shareholders backed the dividend move. "Over the course of the summer, I've met with at least 70 percent of the share register. We know that they're very supportive," he said.

Thorley said the decision would allow Punch to fund any future refinancing of the business through its own resources.

He said Punch was spending "well in excess of 10 million pounds" to help struggling licences through rent concessions and promotions on food and drink -- further illustrating pressures on the industry.

On Tuesday, Greene King reported a decline in like-for-like sales across its 2,500 pubs in England and Scotland over the 16 weeks to August 24, saying the poor summer weather had added to the industry's problems, while in July Enterprise Inns said profits were under pressure from falling beer sales and the cost of helping struggling tenants.

Whitbread and JD Wetherspoon are due to give updates later this week.

Punch said its performance had continued broadly in line with market expectations and it remained confident of delivering full-year profit in line with market forecasts.

The consensus estimate for full-year pretax profit before exceptional items stands at 267 million pounds, according to Reuters Estimates.

Investec analyst Matthew Gerard said Punch was continuing to underperform its peers and he expected trading to get more difficult over the next six months.

Gerard cut the stock to "hold" from "buy" and said he was likely to cut his 2008 pretax profit forecast by 2 to 3 percent to 268 million pounds and his 2009 forecast by about 14 percent to 250 million.

(Editing by Will Waterman and David Holmes)