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Will Tesco halve its dividend? Analysts predict sharp cut to payout

Nick Paler
Written By:
Nick Paler
Posted:
Updated:
18/08/2014

Tesco is coming under increasing pressure to slash its dividend in order to free-up cash to help it compete against low-cost rivals, with a leading shareholder speaking out over the weekend and analysts predicting a major cut to its payout.

Tesco’s incoming chief executive Dave Lewis faces an uphill struggle to turn around the business in the face of increasing competition from low-cost competitors such as Aldi and Lidl which have eaten into sales.

Shares in the group have tumbled over the last 12 months, down a third against a rising FTSE 100.

One solution for Lewis – who joins in six weeks – may be to cut the group’s dividend to save cash, with a leading investor voicing his support for such a move over the weekend.

Speaking to the Sunday Times, David Herro of Harris Associates, which owns 3% of Tesco, said: “In general, dividends should be covered by free cash.

“This is not the case with Tesco . . . Either [the company needs to cut the dividend] or generate positive cashflow. It should be cut if it’s paid for by borrowing.”

A cut to its dividend would likely hurt the share price in the near term, although the group may consider it necessary regardless in order to turn the business around.

The dividend costs over £1bn a year, money that Lewis may believe can be better spent reducing prices in the latest round of the ongoing supermarket price war.

Shore Capital’s retail analyst Clive Black said: ‘Tesco needs to become more competitive in its core grocery market and this may involve a considerable profit margin reset.

‘The dividend costs £1.1 billion a year. We cannot rule out that it will be cut to contribute to an improved operating performance and comprehensive change programme.

‘‘We expect a cut of between 25-50% from new management depending on the amount Dave Lewis believes he needs to deliver medium-term growth.”

HSBC’s Dave McCarthy is also forecasting a halving of the dividend when the group reports its next results just after Lewis lands at the group.


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