FTSE 100 dividend cuts and a remarkable story on AIM

There’s a perfect storm brewing for the property sector that could mean bad news for income investors. On a positive note, our City expert reports on an exciting AIM share that just keeps rising.

Big downgrades for British Land (LSE:BLND), Diageo (LSE:DGE) and Pearson (LSE:PSON) were not enough to derail the FTSE 100 index today as London’s outperformance continued thanks to oil giants BP (LSE:BP.) and Shell (LSE:SHEL).

Brent crude’s return to near $120 a barrel pushed the heavyweight pair 2.5% higher and meant the blue-chip index was close to its opening mark late afternoon, compared with losses of more than 1% for the FTSE 250 index and for benchmarks in Europe.

The underlying picture in London’s top flight was one of recession uncertainty, after last night’s weak US consumer confidence reading and today’s revision to first-quarter US GDP, which showed the economy contracted by a little more than expected.

Heightened broker caution added to the nervous mood among investors, particularly in the property sector after Bank of America turned bearish on offices amid a “perfect storm” that includes stagflation and working-from-home disruption.

The bank said: “The cost of borrowing is now solidly higher than investment yields - a situation not seen since 2007.”

• Stockwatch: is the tide turning for this small-cap share?
• The only three FTSE 100 shares not expected to pay a dividend this year
• The investments that will keep growing – even during a recession

It forecast dividend cuts, including at British Land as the bank downgraded its price target on the London office firm by 21% to 440p. Land Securities is also down 17% to 720p, but Derwent London keeps a “buy” recommendation to reflect a “best-in-class prime office portfolio, low leverage, low refinancing needs and cheaper sterling refinancing costs”.

Two other FTSE 100 stalwarts to receive the red pen treatment today were coursework publisher Pearson and drinks giant Diageo.

UBS cut Pearson to “sell” and a 620p target because it thinks expectations for higher education are too positive given trends in US college enrolments. Today’s note flags that Pearson trades at a premium to peers such as RELX (LSE:REL) and Informa (LSE:INF), which offer higher top line growth and less near-term earnings risk.

Diageo is a staple in many portfolios, but analysts at Deutsche Bank think the Guinness-to-Smirnoff firm is now “priced for perfection” at last night’s 3,680p.

Downgrading its target to 3,230p, the bank believes US spirits growth has slowed and fears inventory levels may overshoot. It adds that Diageo is the only European beverages company that doesn't trade at a discount to its three- and five-year average earnings multiple.

The broker added: “We therefore believe Diageo needs upgrades to outperform and see that as increasingly unlikely as macro and category headwinds build.”

Other top flight fallers included Whitbread (LSE:WTB), which dropped 83p to 2561p after announcing that Alison Brittain is to stand down as chief executive at the end of the 2023 financial year.

She will be replaced by Dominic Paul, who is the boss of Domino’s Pizza UK and knows Whitbread well having run its Costa Coffee business prior to its sale to Coca-Cola.

• ii view: Whitbread's Premier Inn chain keeps outperforming
• 60 reasons to sell your UK shares
• How AIM shares can bounce back from 2022 crash

Earlier this week, Liberum upgraded its price target on Whitbread to 3,320p following the recent outperformance of its Premier Inn business in the UK. Upgrading its 2023 profits forecast by 33% to £270 million, the broker noted that shares were down 15% year-to-date despite scope for further upgrades, higher dividends and buybacks.

Domino’s shares fell 22.2p to 287.4p, which compares with 458p at the start of 2022.

Elsewhere, one of the stock market’s more remarkable turnaround stories continued today when high street retailer Shoe Zone (LSE:SHOE) delivered another strong trading update.

Its AIM-listed shares surged another 20p to 175p, leaving them near where they were at the start of the pandemic. When Covid struck, the retailer pulled its 2019 dividend in order to conserve cash and later told investors not to expect a payment before 2025.

In May, however, the company revealed that it would hand shareholders 2.5p a share on 17 August after eliminating debt and repaying its government loans.

Trading has been encouraging since the May half-year results, with strong margin improvements and cost savings benefiting from rent reductions and good supply chain management. It now expects profits for the year to 2 October to be not less than £8.5 million.