I never expected the cut to be as savage as 75%. Tescos first-half dividend will be just 1.16p per share, down from the 4.63p paid in the same period last year.
Clearly, drastic action was called for, with new figures showing trading profits would fall by as much as 27% this year. Thats the second profit warning in the last two months.
Perversely, todays news could also be the best thing that has happened to Tesco in some time.
2014 has been annus horribilis for Tesco. Its share price has dropped from 330p to 235p since January, a fall of nearly 30%.
Earlier this week, wewarned that Tescos shares could only be worth 200p. Todays dividend destruction makes that more likely. Tesco is already down around 7% on the day. Understandably so, given that its whopping dividend (deceased) was the single most alluring item in its shop window.
But this also be the spur for radical action at Tesco badly needs.
Action This Day
The action has started. New boss Dave Lewis will now start on Monday, one month earlier than originally planned. You cant waste time when youve got the UKs number one retailer (ailing) to save.
His job is to review all aspects of the group to improve its competitive position and deliver attractive, sustainable returns for shareholders. He has a battle on his hands.
Shoppers fell out of love with Tesco some time ago, but keptgoing there anyway, because they thought it was cheap. Then they discovered Aldi and Lidl.
This Means War
It will be interesting to see whether former chief executive Philip Clarkes goalof making Tesco stores a destination by adding family restaurants and artisan bakeries will survive. In todays cut-throat, cut-price grocery sector, his strategy looks fanciful.
No prizes for guessing what most of the dividend money will surely be spent on. Investors have little to gain from a supermarket price war, but theyll get one anyway.
My worry is that shoppers are in a churlish mood, and Tesco will struggle to match the German discounters of price and pulling power. That said, the Morrisons price war did pay off, delivering a 2.4% rise in sales over the last month, and a modest share price increase as well.
Maybe Tesco can repeatthe trick.
Lewis needs to do a lot more than that. He needs to refresh the brand, improve staff attitudes, and recapture customer goodwill.
That wont be easy given todays challenging conditions (will wages at the bottom ever rise?), and a 400m cut in Tescos planned capital expenditure to 2.1bn.
Worryingly, spending cuts will be focused on two areas which could drive sales: IT, needed to develop its successful online sales channel, and its store refresh programme, which now faces a slower roll-out.
Tesco Could Turn It around
It is always darkest before the dawn, but at least senior management has grasped the fact it is in a dogfight, and is baring its teeth (even if shareholders are the first victim).
As the UKs largest supermarket, Tesco has plenty of firepower, especially with the dividend saving. It retains the power to spring surprises, such as last years successful budget-priced hudl tablet.
Tesco also boasts an impressive 45% share of the fast-growing online grocery market, far larger than its 28.8% share of the overall beleaguered grocery market. Its Metro and Express stores are successful (if often just as scruffy and unkempt as the cornershops theyre competing with). Click & Collect has proved a hit.
Best of all, youll be buying in the certainty that the dividend will be pathetic. Yes, thats terrible news, but it does mean that you are getting the share 7% cheaper than yesterday.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK ownsshares of Tesco. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.