Yell, the debt-laden Yellow Pages publisher, announced plans yesterday to cut its dividend by half to shore up its balance sheet.

The group's shares fell 26 per cent as it said also that underlying profits would be “broadly flat” and that “tougher economic conditions” were holding back progress.

John Davis, the group's chief financial officer, voiced fears of recession, saying that businesses had cut spending, opting for “quarter- page, rather than half-page adverts”.

“Companies are much more cautious about their spend,” Mr Davis said. “It's difficult for all businesses to operate in the current market ...If recession was dictated by caution, then I think we are there.”

Yell said that it had decided to halve its investor payout to 5.7p per share because of an “uncertain economic outlook” and in order to provide greater financial flexibility.

It will save £68 million by the dividend cut, although this will have little impact on its overall borrowings, which have increased by about £100 million to £3.76 billion in the year to March 31 - more than five times last year's operating profit.

Mr Davis dismissed industry speculation that Yell could launch a rights issue. “A rights issue is not on the cards. We have very strong cashflow,” he said.

However, some analysts favour a rights issue as a means of reducing the company's debt.

“We calculate that a one-to-one rights issue at 80p would raise £628 million, thereby reducing debt to more manageable levels.

"The group is exposed to a deteriorating economic outlook in its core markets, structural challenges and has high leverage,” Numis said in a note.

Yell said that its bank facilities were committed until 2011 and that it was operating within its banking covenants.

Revenues in the UK increased 1.7 per cent to £732.1 million in the year to March 31, slightly below the guidance of 2 per cent, driven by Yell.com's revenue growth of 45.2 per cent, which more than offset the expected 5.8 per cent decline in print.

The publisher has been helped by the relaxation of British price controls. The previous inflation minus 6 per cent control - which effectively forced Yell to cut its Yellow Pages prices - was scrapped in March.

In the United States, where Yell is the largest independent directory publisher, the company earned £292.4 million, down 1.5 per cent in sterling terms but 3.7 per cent ahead on a constant currency basis.

Yell's Spanish-language unit earned £185.9 million in its first full year of ownership and is the only one of its three divisions that is forecast to increase profits.

The group said that prospects for next year were challenging, highlighting “considerable downward pressure from the tougher economic conditions”.

“We believe that there will be upward pressure on revenue from the relaxation of the price control in the UK, the improved sales approach in Spain, and from continued growth of our internet products,” the group said.

Analysts at Kaupthing said: “While there could be some relief that the update is not worse and Yell is acting to stay inside its debt facilities, events still could tip it over the edge and without dividend support it is hard to see a reason to buy.”

Shares in Yell fell 55p to 154p.

Google threat of Yell dismissed

John Davis, Yell's chief financial officer, said yesterday that Google was not a threat to Yell, the directories group.

However, the internet search giant has posed a challenge for Yell with the offer to build free advertising campaigns for small businesses.

In the past two weeks, Google AdWords has sent the owners of small businesses information offering Jumpstart, a free support service, which aims to create customised campaigns for SMEs.

Industry sources said that Google's move was likely to affect Yell. Google said in its advert that it would advise “on which targeted keywords, ad creative and budgets will achieve a successful campaign”.

There have been concerns that the increasing popularity of Google with business owners will push businesses away from Yell.

Mr Davis said that he did not not see Google as serious competition.

“Economic pressures have affected our revenue ... not Google. I don't believe Google is growing as aggressively as it was in the past.”

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