Punch Taverns, Britain's largest pub chain, said yesterday that it would scrap its dividend, offering a further sign that Britain is not going down to the local to forget the credit crunch.

When Punch acquired Spirit for £2.7 billion in January 2006, the smoking ban was in the future, property prices were soaring and banks were lending money freely.

However, the 8,500-outlet group gave warning yesterday that it would find it tougher to repay the £295 million convertible bond used to fund the Spirit acquisition by December 2010.

Punch said that it wanted to keep the dividend cash to shore up its balance sheet and allow licensees at its leasehold pubs to offer drinks discounts and other sales promotions.

Giles Thorley, its chief executive, said: “While news of the dividend seems to have shocked people this morning, we have been talking to our shareholders about our plans and they have been very supportive.” The group's average dividend yield had always been less than 1 per cent.

The announcement hit other pub operators. Enterprise Inns closed down 8.7 per cent, or 27p, at 280p and JDWetherspoon closed down 2.9 per cent, or 8p, at 265p. Shares in Punch itself dived by more than 12 per cent, or 38p, to 278p.

Mark Brumby, an analyst at Blue Oar Securities, the advisory and stockbroking group, said that Punch appeared to be preparing for difficult trading conditions for the rest of the year. “The pressure on pubs in general remains relentless,” he said.

There are expectations that other pubs groups are facing similar challenges. JD Wetherspoon is updating the market this week and Enterprise Inns is reporting its annual results to September 30 on November 18.

A statement this week from Greene King was more positive, although there were signs that its tenanted premises had come under pressure. Sales in its pubs were down 1.6 per cent on a like-for-like basis in the first 16 weeks of its financial year to August 24. This was a better performance than the fall of 2.8 per cent it reported for the first eight weeks. However, like-for-like profits at the company's tenanted estate fell 1.7 per cent for the 16 weeks, compared with an unchanged performance in July.

Mr Thorley said: “We [Punch] are expecting 2009 to be challenging, but it is not yet rip-your-hair-out time. At some point, people will become so depressed they will want to drown their sorrows.”

In a statement before its full-year results on November 4, the group said that it would meet expectations on profits before exceptional items, despite taking a hit of about £6 million after giving some of its struggling pub leaseholders concessions on their rent. It said: “While cashflows remain strong, we are mindful of the ongoing challenging market conditions that impact both our licensees and our managed business. It is important that we continue to invest in our pubs alongside our licensees to ensure that we continue to improve the quality of our pub estate.”

Punch said that like-for-like contributions from its 7,560-outlet leased estate was down 3.4 per cent, as the company had flagged earlier in the year. The company repaid £75 million of debt in the year to August 23.

Mr Brumby has estimated that the average pub tenant could see a 90 per cent decline in profits from an average of £32,850 in the present year to £3,259 next year as costs increase and the credit crunch takes its toll. Trade beer sales are under substantial pressure and have fallen by about 9 per cent in the year to May 2008. “Supermarket beer is now very cheap and when the punter has Sky at home and can smoke when he wants to, the settee looks increasingly attractive,” he said.

Punch has also reported that it would be delaying its conversion to a real estate investment trust because of costs and the fact that it would have to pay substantially bigger dividends.

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