Market Report: 02 is ready to fly, even without a bid in sight

O2's interim results next month are likely to contain a pleasant surprise for shareholders. Investec Securities believes the figures will flag a increase in the mobile phone operator's dividend. The broker also suggested a sizeable share buy-back could be on the cards further down the line.

To those who have been disappointed by the lack of a bid for O2, Investec has one message: the stock should get to 175p without a takeover offer. "The current downturn in bid chatter provides a buying opportunity ahead of the November interims, in particular because we foresee the opportunity for a surprise on shareholder distribution", Investec said.

It expects O2 to raise its dividend for the year to March from 4.5p a share to 5p. For the next year, the broker predicts a jump to 6.2p. Even after such a increase, Investec believes the group has the firepower for a substantial share buy-back. Further down the line, it believes that investors should not be surprised to see O2 unveil a buy-back programme which could be worth up to £2bn. O2 is able to return such colossal amounts of money to investors because of its booming cash flows. These have been boosted by the impressive performance of the group's core UK business and also by a major turnaround at its once struggling unit in Germany.

All this talk of extra money for shareholders lifted O2 1p higher to 153p. Meanwhile, the FTSE 100 continued to retreat, falling 3.7 to 5,164.1. Bulls of the market had hoped blue chips would stage a strong recovery after Wednesday's slump. For a while this looked to be on the cards as the FTSE 100 rose to 5,234 in early trading. But a negative start to business on Wall Street saw investors on this side of the Atlantic once again rush for cover.

The FTSE 250 rose 65.1 points to 7,486.6 as oil explorers soared after news of Talisman Energy's £1.2bn bid for Paladin Resources, up 74.5p to 349.5p. Venture Production rose 35p to 480p, Tullow Oil put on 11.75p to 230.5p, Burren Energy added 31.5p to 752p and Dana Petroleum improved 51p to 822p. Melrose Resources soared 15.5p to 365.5p after boasting of an exploration success at its site in Egypt.

Among the blue chips again, Barclays rose 10p to 539p after Dresdner Kleinwort Wasserstein upgraded its stance on the banking giant to "buy" from "hold". It believes that investors are too pessimistic about the outlook for consumer loans and bad debt in the UK. Although the German broker is bullish about Barclays shares, it does not believe the group is a likely takeover target. It has long been rumoured that Bank of America or Citigroup might be tempted to pounce on Barclays. But Dresdner suggests further acquisitions by Barclays are more likely.

Merrill Lynch applauded International Power's £2bn bid for Drax. The broker said: "Drax would complement and strengthen International Power's UK portfolio." Even if the group's offer proves to be unsuccessful, Merrill believes its shares, 4.25p higher at 222.25p, offer great value at current levels.

JD Group rose 6p to 247.5p as Schroders confirmed it had sold its entire 19.6 per cent stake in the sportswear retailer. The shareholding is believed to have been bought by Mike Ashley's Sportsworld International, which picked up a 9.6 per cent stake in JJB Sports last week. With such a large stake in JD Group, market professionals reckon Mr Ashley, who owns the Sports Soccer chain, will be keen to secure a seat on the group's board.

Civica gained 1.5p to 231.5p after the software group announced that five more local authorities had decided to use its suite of financial management products.

Lower down the pecking order, Terrace Hill ticked 0.25p higher to 41p amid yet more director share-buying at the property firm. Robert Adair, its executive chairman, picked up 135,000 shares while the managing director, Philip Leech, bought a more modest 40,000. Likewise, the packaging group Robinson rose 5p to 70p after the purchase of 15,000 shares at 65p by Guy Robinson, its finance director.

Aminex added 1.75p to 19.25p after the Irish oil explorer was heard to have made a series of bullish presentations to institutional investors in Dublin and London. Aminex certainly operates in some of the world's more exotic countries. It secured an oil concession in Madagascar this week and has assets in North Korea, making it one of only handful of companies which have exposure to the most closed society on the planet.

Finally, Chacco Resources held steady at 6.2p despite some whispers that the oil explorer is looking to complete an equity fundraising at 6p.