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FTSE breaches 6,400 despite RSA dividend pain

FTSE breaches 6,400 despite RSA dividend pain

(10:05 UPDATE) The FTSE 100 has climbed above the key 6,400 level, up 21 points or 0.3% on the day.

The move higher comes despite a near 14% slump in RSA shares, after the insurance company cuts its dividend (see report below).

The pound meanwhile has dropped sharply after the minutes from the Bank of England’s latest policy meeting showed a greater split over the need for more quantitative easing. See separate article.

Central bank stimulus is deemed bad for a country's currency, but provides a boost to equity markets.

(08:40) FTSE firm as RSA hits investors with dividend cut

A painful 33% cut to its ‘unsustainable’ final dividend ensured shares in RSA Insurance sank in Wednesday morning trade, with other insurance company shares following in its wake.

The insurance company weakness, coupled with a string of companies trading ex-dividend, knocked just one point off a resilient FTSE 100, which was little moved from last night’s close of 6376, the highest closing level in five years. Other European shares were mixed, with Germany higher and France lower.

RSA (RSA.L), the general insurance company known for its More Than brand in the UK, dropped 13.5% to 117.9p after the announcement that it would pay a final dividend for 2012 which will be 33% lower than that of the prior year and expects a similar drop in the interim dividend for 2013 versus 2012. The cut reflects expectations that bond yields will remain at rock-bottom, but was 'in the best interest of our shareholders,' said RSA chief executive Simon Lee.

‘Earnings in recent years have been reduced by the material fall in bond yields which has led to a situation where our dividend payout ratio was becoming unsustainable,’ Lee added, in comments that dragged down his competitors’ shares.

Aviva (AV.L), which has been subject to dividend doubts of its own, was 2.7% lower to 359p. Admiral (ADML.L) dropped by 1% to 2,460p.

RSA did however manage to report 2012 numbers that were better than the market had expected. Eamonn Flanagan, an analyst at Shore Capital, said: ‘Once the dust settles we urge investors to revisit the shares and indeed we would view such weakness as a buying opportunity due to the prospects for the group outside the UK and the expectations for good RoE delivery in the coming years.’

Other analysts weren’t so forgiving: Panmure cut the shares to ‘sell’ from ‘hold’

Initial analyst reaction to RSA dividend cut:

Sami Taipalus, Berenberg: ‘We appreciate the company’s efforts to grow in emerging markets, but do not consider these sufficiently attractive to make up for the lower dividend in the near term. However, it is likely to leave the company in a better position to grow earnings in the longer term, partly as it makes M&A a possibility again.’

Srishti Gupta, Nomura: ‘Although the dividend cut means the stock is better placed in terms a providing a sustainable dividend and being able to finance growth, we highlight one of the main attractions of RSA has always been its high dividend yield.

‘For investors looking for yield, we would highlight Admiral (Buy) and DLG (Neutral), which offer 2013E yields of 7.5% and 5.7%, respectively.’

Marc Kimsey, Accendo Markets: 'Had the dividend-cut been accompanied by a weak trading statement, the fall of 14% might be justified. However, the trading floor believes the sell-off is harsh and applaud the Board's swift reaction to low-yielding bond incomes.'

Eamonn Flanagan, Shore Capital: ‘Once the dust settles we urge investors to revisit the shares and indeed we would view such weakness as a buying opportunity due to the prospects for the group outside the UK and the expectations for good RoE delivery in the coming years. We reiterate our BUY recommendation on the stock.’

BHP Billiton (BLT.L) dropped 2.2% to 2,185p after the Anglo-Australian mining group announced a 58% fall in half year net profits, alongside the news that chief executive Marcus Kloppers will retire in May, to be replaced internally by base metals boss Andrew Mackenzie. Analysts at Morgan Stanley said the CEO change 'could prove a positive catalyst', with no major change to the company's strategy expected.

Adding to the downward pressure on the FTSE, GlaxoSmithKline (GSK.L), Carnival (CCL.L), Barclays (BARC.L) and Reckitt Benckiser (RB.L) were all trading ex-dividend.

But supporting London shares, Wall Street climbed on Tuesday, with the benchmark indexes scaling their highest levels in five years, amid increasing optimism over deal-making and a report showing increasing investor confidence in Germany. Asian markets followed the US higher, with Japan’s Nikkei also closing at a five year high.  

In currency markets, the pound was flat against the dollar at $1.5423 and down 0.2% against the euro at €1.1493 having suffered yesterday on unsubstantiated rumours that Standard & Poor’s was about to downgrade the UK’s credit rating from AAA.

The euro resumed its shift higher, up 0.3% against the dollar to $1.3423.

Investors have plenty of major news releases to look ahead to today, including a report on Eurozone consumer confidence, and the minutes of the latest monetary policy meetings from both the US Federal Reserve and Bank of England.

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