October 4, 2017 / 7:30 AM / 2 years ago

Dividend return and credit rating hint bolster Tesco's recovery

LONDON (Reuters) - Britain’s Tesco (TSCO.L) said it would pay a dividend for the first time in three years and was close to getting its debt back to investment grade status, signaling further progress in its recovery from crisis under Chief Executive Dave Lewis.

The UK’s biggest retailer reported on Wednesday a 27 percent rise in first half profit and a seventh straight quarter of underlying sales growth in its home market as it successfully navigated an inflationary environment.

However, Tesco’s shares fell as much as 4 percent, reflecting lingering concerns over the merits of its 3.7 billion pound ($4.90 billion) agreed bid for wholesaler Booker BOK.L, UK consumers’ waning spending power and the threat of online rivals.

The stock was trading at 230 pence when Lewis joined in Sept. 2014. It was 183 pence at 1444 GMT.

“If we continue to deliver on that turnaround, we get ourselves to a place where there’s a 3.5 or 4 percent operating margin (by the targeted 2019-20) then the share price that we have today will move,” Lewis told reporters.

He has been leading the fightback after Tesco’s sales and profit were hammered by changing shopping habits, the rise of discounters Aldi and Lidl and a 2014 accounting scandal which plunged the firm into its worst crisis in its near 100-year history.

Lewis, who joined just before the scandal was uncovered, said paying the 1 pence interim dividend was a key moment.

“It’s a significant milestone in the recovery of the business and one which demonstrates the confidence we and the board have in our plans,” he told reporters.

Fund manager Ed Meier at Old Mutual Global Investors, one of Tesco’s top-40 investors according to Thomson Reuters data, said he expected a 3 pence dividend for the full year.

“While we anticipated this return to the dividend list, we still consider this a strong indication from the company that it is indeed on track for a full recovery.”

Tesco’s debt, downgraded to “junk” status in 2015 could return to investment grade “in the not too distant future,” Lewis said.


Lewis first stabilized Tesco, then got it growing again with a focus on more competitive prices, new and streamlined product ranges, better customer service and improved supplier relationships.

“We’ve fundamentally transformed the way we run our business,” he said.

Tesco remains the largest of Britain’s supermarket groups by a clear margin, having a market share of almost 28 percent according to the latest industry figures.

It made operating profit before one off items of 759 million pounds ($1 billion) for the six months to Aug. 26 - ahead of analysts’ forecasts. Sales increased 3.3 percent to 25.2 billion pounds.

UK like-for-like sales rose 2.1 percent in the second quarter - a slight slowdown from 2.3 percent in the first quarter.

Cost savings helped to push up the group operating margin to 2.7 percent from 2.2 percent last year.

Net debt was down 25 percent year-on-year to 3.3 billion pounds. Tesco said its pension deficit had reduced to 2.4 billion pounds but it would still increase annual contributions by 15 million pounds to 285 million from April 2018.

A Tesco supermarket is seen, in west London on September 30, 2008. . REUTERS/Toby Melville/Files

Lewis said Tesco had not seen any change in buying patterns in the wake of a joint investigation by the Guardian and ITV News that reported evidence staff at a central England plant of chicken supplier 2 Sisters had tampered with food safety records. Last week 2 Sisters suspended operations at the site so it could re-train staff.

The Booker deal is currently being probed by Britain’s competition regulator. Provisional findings are expected to be published by the end of this month, ahead of a final report by the end of the year.

($1 = 0.7546 pounds)

Additional reporting by Simon Jessop; Editing by Keith Weir and Mark Potter

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