Investors raised a glass to Mitchells & Butlers yesterday even though the Birmingham-based pubs operator scrapped its final dividend and told shareholders not to expect a resumption before 2010.
Shares gained seven per cent at one stage before easing back to close six per cent ahead at 147.25p as the stock market took cheer from a strong set of year-end financial results and an upbeat assessment of current trade.
M&B said it was scrapping the dividend – a move that will save it £60?million a year – as it diverts cash into paying down £2.7 billion of debt.
The owner of the Harvester, All Bar One and O’Neills chains said it is focused on reducing the levels of unsecured medium-term debt and will suspend dividend payments until debt on a three-year banking facility, £475? million, falls below £300?million.
M&B, which has 2,000 UK pubs, will reduce its capital expenditure by over £70?million this year by cutting back on expansion and focusing on maintenance of the existing estate.
Chief executive Tim Clarke declined to give a specific prediction on when the payment of dividends will resume.
“Certainly, for 2009, it’s most unlikely. We would expect the drawings on the facility to be comfortably under the £300 million level ahead of schedule in 2010,” he said. “We regret having to take this decision.”
Blue Oar Securities analyst Mark Brumby said the dividend cut was the right thing to do. “Anything that moves M&B from the ‘probable survivor’ to the ‘definite survivor’ category will be taken well,’’ he said.
Shares in M&B, which have lost over two-thirds of their value since the start of the year on fears over debt and the deteriorating consumer environment, were up seven per cent at 147.5p.
Citigroup analyst Richard Taylor said the dividend move was “not entirely unexpected by the market”.
“This increases the probability that M&B will manage its large debt burden and survive the UK recession in decent shape,” he said.
In September, Punch Taverns, Britain’s biggest pub operator with debt of £4.5 billion scrapped its year-end dividend, saying it made sense to retain cash to bolster its balance sheet.
Britain’s pubs have been hit hard by the impending recession, a smoking ban, hikes in beer duty and poor summer weather, while cheap alcohol offers in supermarkets have encouraged drinkers to stay at home.
M&B yesterday reported a decline in full-year profits although the results were at the upper end of expectations.
Pre-tax profit for the year to September 27 fell by 13.5 per cent to £179 million compared with market forecasts that ranged from £165?million to £180?million.
M&B said like-for-like sales increased one per cent over the year, boosted by strong food sales which increased 7.2 per cent per pub. Trade is resilient in the north and midlands, the company said.
Since the period end, M&B said current trading had been resilient as it maintained like-for-like sales growth of one per cent in the eight weeks to November 22.
It said its “value and volume” strategy meant it was well placed to cope in a recession.
It pointed out the average price of a meal in its pubs was £6.05 and that the average price of a pint of standard lager was more than 40p cheaper than average in leased pubs.
The first year of the nationwide smoking ban has also helped the business as it grew food sales per pub by 7.2 per cent in the last year.
Mitchells said commodity price volatility remained high and while there had been encouraging reductions in wheat and oil, input costs on food and gas and electricity have remained at historically high levels.
As a result it expects a £30?million increase in food and energy costs in the current year, while there will also be a £20?million increase in regulatory costs driven by the national minimum wage and holiday pay increases.