Tesco slashes dividend after second profit warning in two months

Fri Aug 29, 2014 10:27am EDT
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By Kate Holton and Neil Maidment

LONDON (Reuters) - Tesco (TSCO.L: Quote) will slash its dividend and investment spending to give its new boss more firepower to rebuild Britain's biggest retailer, after a second profit warning in two months showed the scale of the task he faces.

The grocer said on Friday that as a result of its worsening performance, former Unilever (ULVR.L: Quote) turnaround specialist Dave Lewis would start on Monday - a month earlier than planned - with a remit for a major review of the 95-year-old business.

The latest profit warning lays bare the need for a change at a company once considered an unstoppable engine of growth, with annual trading profit now expected to come in around 25 percent lower than last year - a third straight year of decline.

Analysts said the 75 percent cut in the half-year dividend to 1.16 pence per share was much deeper than expected, but it would give Lewis greater flexibility to revive the world's No.3 retailer, such as by cutting prices.

Shares in Tesco, which have been languishing near a 10-year low, slumped 6 percent to wipe around 1.2 billion pounds off its market valuation. An initial fall of 8.5 percent was its greatest single drop in two and a half years.

"We are not expecting a quick turnaround," said Niall Dineen, a portfolio manager at AGF International Advisors, who increased his holding in Tesco on Friday morning.

"We think it will be a couple of years for margins to recover and we think the share price could be under pressure for a while."

Rival Sainsbury's (SBRY.L: Quote) fell 4.5 percent and Morrisons (MRW.L: Quote) dropped 4 percent on fears that Lewis could plough cash into slashing prices and spark an industry-wide battle.   Continued...

Grey clouds hang over a Tesco Extra store in New Malden southwest London June 4, 2014.  REUTERS/Luke MacGregor