Tesco to slash dividend after fresh profit alert

Tesco: 'On the rack'. Picture: Rob McDougall/TSPL
Tesco: 'On the rack'. Picture: Rob McDougall/TSPL
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EMBATTLED Tesco slashed its interim dividend by 75 per cent and its annual capital spending by £400 million yesterday, as Britain’s biggest retailer stunned the market with another profit warning.

In a fresh sign of the turmoil at the supermarket giant, it revealed that new chief executive Dave Lewis will now start on Monday, a month ahead of schedule, and his predecessor Phil Clarke will step down from the board on the same day.

Clarke, who was in charge of a failed £1 billion turnaround programme at Tesco until ousted shortly after a profits warning in July, was to have helped former Unilever executive Lewis in a transition period lasting to the end of this year.

Shares in Tesco crashed to an 11-year low, closing down 6.6 per cent at 229.95p on the latest raft of changes. Phil Dorrell, director of consultants Retail Remedy, said: “A dividend cut of this degree underlines the extent of the problems Tesco is facing.

“Throw in the fact that Lewis is being parachuted in a month early and you have a grocer that is truly on the rack. What’s certain is that we won’t be seeing a rapid turnaround.”

Tesco said in its statement: “The combination of challenging trading conditions and ongoing investment in our customer offer has continued to impact the expected financial performance of the group.

“The business continues to face a number of uncertainties, including market conditions and the pace at which benefits from the investments we are making flow through in the second half and consequently the board has revised its outlook for the full year. We now expect trading profit for 2014-15 to be in the range of £2.4 billion to £2.5bn.”

That compares with previous City forecasts of £3bn. The dividend cut to 1.16p is deeper than the City had been expecting, and will be a blow for many UK pension funds, but analysts estimate it could save the company as much as £900m a year.

Tesco chairman Sir Richard Broadbent, who supported Clarke’s continued stewardship of the company at the AGM earlier this summer, said: “The board’s priority is to improve performance.” He added that the dividend cut was necessary to retain “a strong financial position and strategic optionality.”

Many City analysts believe the hoarding of cash is meant to give Lewis the firepower for a major price promotion campaign to take on rivals like Asda and Morrisons, and the German discounters Aldi and Lidl.

Industry data released this week showed Tesco’s sales decline had worsened, hurt by the weakest overall market growth in a decade, with sales down 4 per cent year on year in the 12 weeks to 17 August. Its market share has dipped to 28.8 per cent from the 30.7 per cent it held when Clarke took over from predecessor Sir Terry Leahy in March 2011.

Paul Cavanagh, a partner at the Killik and Co brokerage, said he expected Tesco “to come back to the table with further price cuts and to keep this industry under a lot of pricing pressure over the next year or two”.

Lewis is also expected to look at whether the group should stay in all its 11 foreign markets, with Thailand and Turkey often mentioned by brokers as possible targets for disposal.