Shares in McCarthy & Stone took a hit yesterday after the builder of some two-thirds of Britain's retirement homes combined an unexpectedly sharp dip in full-year profits with a warning that this year is unlikely to be any better.

The stock market refused to take comfort from a final dividend raised to 14p to give a 12 per cent increase for a year, still covered 4.5 times by earnings, when profits fell 14 per cent to £127.4 million.

The shares tumbled 32p to 615p, 7.0 times the year's earnings, where they yield 3.2 per cent.

One problem arose from a trading statement in September, shortly after McCarthy's August year-end, saying the second half-year had turned out "better than expected". Yesterday the City took the view that this had been an over-statement.

McCarthy's executive chairman Keith Lovelock described the results as a " resilient performance in the face of the toughest market we have seen for years".

"As sales came under pressure in the later months we took prudent action to reduce our land buying and accept a slower rate of build starts," he added.

"Clearly the housing market is not showing any significant signs of improvement at present. So we anticipate another testing year."

As McCarthy scaled back its building programme, it made 40 people redundant in early September.

One reason for lower margins - sales were 2.6 per cent higher at £325.6 million - was that McCarthy had to spend more on incentives to persuade hesitant buyers to commit themselves. These cost an average of £3,000 per unit sold, up from £2,200 the year before.

In cases where elderly people fail to find a buyer for their previous homes, McCarthy arranges part-exchange deals.

The Midlands region accounted for 12 per cent of the year's sales, as in 2003/04.

"Several new sites are going well, including Tamworth, Droitwich and Balsall Common," said Howard Phillips, who took over as chief executive on September 1.

He stressed McCarthy's strong position as the dominant force in its specialist market at a time when the number of elderly people is growing. The decision to raise the dividend, he added " reflects our confidence in the market and our place in it".

Another factor was the strong balance sheet. After spending £18.4 million to buy its head office in Bournemouth and another £5.2 million buying back its own shares at an average price of 544p, McCarthy finished the year with £38.3 million of cash.