Dividend and rule stories hurt Abbey

There was no respite for Abbey National yesterday as its share price took another hammering after a leading broker downgraded and warned that its dividend may be too high.

Abbey shares fell last week after the mortgage bank told shareholders that it might have to hang on to the cash raised from selling its £60bn high-risk portfolio of investments. It blamed accounting changes and new regulatory rules.

Merrill Lynch, which cut Abbey to neutral from buy yesterday citing concerns about the performance of the bank's core retail operations, believes the real reason the cash is not being returned is because it has already been used - to pay the dividend.

"Rather than regulatory/accounting changes being the driver behind the caution over distribution, the more plausible explanation is that there is no capital to distribute because there is no capital left to distribute. And there is no capital left to distribute because it is already being effectively returned to shareholders," the US broker said in a note to clients.

The US broker reckons Abbey's dividend may be too high and could need to be cut. Last year Abbey paid a 25p dividend.

Abbey - 550p before last week's results - closed 15p lower at 470p, the second biggest faller in a very strong FTSE 100.

Lifted by a firm opening on Wall Street and a strong performance from the heavyweight oil sector as the crude price hit its highest level since last March, leading shares closed at a 20-month high. The final scores showed the FTSE 100 ahead 44.8 points at 4,537.

The FTSE 250 was also in good form, rising 52.6 points to 6,322.5, while the FTSE Small Cap index added 9.5 to close at 2,706.9. Market turnover was lacklustre by recent standards, with 3.2bn shares changing hands.

In the bond market, gilts sank, unsettled by news that consumers had continued to pile on debt during January. The benchmark 10-year gilt closed around 101.780, yielding 4.798%.

Back among the blue chips, BG was among the top performers again as rumours of a bid from either Total of France or Shell refused to go away. Its shares rose 12.75p to 329.75p, taking their gains since BG announced full-year results on February 17 to almost 19%.

Mining company BHP Billiton was another of the session's high flyers, climbing 20.25p to 514.25p after signing a $9bn (£4.8bn) deal to provide China with 12m tonnes of iron ore every year for the next 25 years.

Rolls-Royce, the aero-engine maker, was another feature as its shares rose 6p to a fresh year's high of 226p. The gains came after joint house broker ABN Amro increased its profit forecasts and target price to 275p. The Dutch broker believes Rolls will make 19.19p of earnings in 2006 and therefore is still cheap.

On the insurance pitch, dealers reported some shrewd buying ofLegal & General, up 1.25p to 101.25p. This was attributed by more excitable market players to rumours of a bid although more sober observers reckoned it was because a big sell order - rumoured to be about 100m shares - had finished.

Intercontinental Hotels Group moved up 17.5p to 537.5p as the sales team at Deutsche Bank pushed the stock hard to clients ahead of this month's full-year results. The German broker believes the figures will show that trading in key markets is starting to recover and that IHG's cost-cutting programme is on track.

Lower down the market, Northern Foods proved to be one of the main talking points in the FTSE 250 as rumours of either a hostile bid or a disposal continued to swirl around the market. However, the shares gained just 1p to 158.5p after Oriel Securities downgraded to add from buy. Oriel believes Northern shares will be static until the company moves on to the next phase of its restructuring.

TBI rose 2.5p to 65.75p as dealers speculated that the airport operator could be one of the first property-backed companies to adopt real estate investment trust status. Other companies that could benefit from the tax-efficient scheme are nursing home operator NHP, up 1.5p to 184.5p, and student accommodation provider Unite Group, 6.5p higher at 212.5p.

Gordon Brown is due to issue a consultation document on how the government intends to introduce REIT alongside the budget on March 17.

Among the small caps, Civica, which provides the software for the parking ticket devices used by traffic wardens, made a solid debut on AIM. Following a £15m fundraising at 175p, its shares ended the day at 188.5p.

· Keep an eye on Torex Retail today. The company, which provides point-of-sale products for retailers such as WH Smith and Dixons, starts trading this morning following a buyout from Torex. The shares, which have been brought to market by stockbroker Evolution Group in an accelerated IPO, are expected to open at a premium to their 40p placing price. Dealers reckon they could go as high as 55p as the market realises that Torex is valued at a significant discount to rivals such as Alphameric, off 1.5p at 89p yesterday.