April 25th, 2012

• Q1 dividend payouts top £18.8bn. But will it last?

• Tesco's 2011-12 results are shaky but the dividend is safe

• Is Tesco turning the corner - too early to tell

• Vodafone’s latest deal fuels further earnings growth and dividend support

Dear subscriber

U.K. dividends payouts soared by 25% in the first quarter of 2012 to reach £18.8bn, according to the latest Dividend Monitor report from Capita Registrars, which analyses data provided by Exchange Data International.

In total, British firms paid out £3.8bn more than the same period in 2011, making 2012 a record for the first quarter.

The headline total dividend payout for Q1 was boosted by two very large distorting factors.

Vodafone and Cairn Energy each paid out £2.2bn in the form of special dividends. Vodafone’s reflects the strong performance at Verizon Wireless, in which it owns a 45% shareholding, while Cairn was returning cash to shareholders on the disposal of assets in India.

But will it last?

Capita expects an acceleration in U.K. dividend payouts as the year progresses, providing the Eurozone doesn’t implode again.

Capita has cut its underlying forecast growth rate to 8.2% for the full year to reflect the slower first quarter.

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Tesco's 2011-12 results are shaky but the dividend is safe

While pre-tax profits were up 5.3% to £3.8bn, Tesco’s UK profits fell for the first time in living memory by 1% to £2.5bn.

The widely mooted dividend cut did not materialize. Instead, the 2011-12 final dividend payment is set at 10.13 pence; up by less than 0.4 per cent when compared to last years' final dividend of 10.09 pence, and this will be paid on July 6th, with the shares going ex-dividend on 25 April.

Once all the actions announced are duly implemented, we should expect a return to profitable growth in the year to February 2014, with a consensus view expecting pre-tax profits to break through the £4bn mark that year, allowing for dividend growth to resume in the upper single digits for calendar year 2014.

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Is Tesco turning the corner - too early to tell

Tesco's 2011-12 UK like-for-like sales were disappointing. Excluding petrol and VAT, like-for-like sales turned increasingly negative through the year culminating in a 1.6% decline in the fourth quarter.

So, it is encouraging to see that the initial steps undertaken in the wake of the shock profit warning in January to reverse the deteriorating situation are having effect as per the figures recently released from market researcher Kantar WorldPanel.

Kantar’s figures revealed that Tesco market share was 30.7 per cent in the 12 weeks to April 15, compared with the 30.2 per cent and seven-year low of 29.7 per cent recorded in the previous two months. However, Tesco's share is still below the 30.9 per cent reported in April 2011.

Tesco's year-on-year sales growth was 4.2 per cent in the 12-week period, lagging market growth of 5 per cent but still an improvement on growth rates seen so far this year. Overall market growth of 5 per cent was the highest since January 2010 but according to Kantar this was mainly fuelled by food price inflation rather than real volume increases.

Tesco's market share has been squeezed by low-cost grocers such as Aldi and Lidl as well as upmarket retailers such as Waitrose.Kantar director Edward Garner said:

"The discounters and Waitrose are outperforming the middle ground as shoppers polarise their spend. This may also be a result of cutbacks on eating out, which have meant that some shoppers are willing to spend more money on bringing the dining out experience into the home”.

Among the UK's top-four grocers, Tesco remains the clear market leader, while Wal-Mart's Asda saw its market share grow year-on-year from 17 per cent to 17.6 per cent, reflecting the conversion of Netto stores acquired last year. Sainsbury's held its share at 16.6 per cent, while Morrisons dipped from 12.1 per cent to 11.9 per cent.

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Vodafone’s latest deal fuels further earnings growth and dividend support

Vodafone's proposed takeover of Cable & Wireless Worldwide for 38 pence per share in cash - valuing the company at roughly £1bn - represents excellent value for Vodafone’s shareholders.

When properly absorbed, the deal could transform Vodafone into a major integrated telecoms business in the U.K., offering for the first time fixed and wireless communications and moving it from fourth to second place, only behind BT. In addition, it will double its corporate business in the U.K., while substantial disposal(s) of some of C&WW’s undersea cable networks as well as tax rebates may make this deal an absolute steal.

In the next few years, the deal is likely to yield substantial operating cost benefits in the U.K., with not only subsequent enhanced earnings potential, but also putting dividend growth prospects on a firmer footing going forward.

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Till next time

Steven Dotsch
Managing editor
EMAR Publishers
Dividend Income Investor.com
Twitter.com @Investoretire

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