The move is an attempt by founders Gordon and Anita Roddick to offer the pipe of peace to City analysts and institutions that have been frustrated by Body Shop's under- performance and apparent discomfort with the demands of being a public company.
It comes just months after the Roddicks abandoned plans to take Body Shop private, a step that would have enabled them to give more money to environmental causes rather than distribute profits to shareholders.
Announcing a 42 per cent rise in the dividend for the year to March, Mr Roddick promised to increase the dividend faster than earnings over the next two years. The shares rose 19p to 179p on the news.
Commenting on the new policy, Mr Roddick said: "Questions are often raised as to whether taking a socially responsible approach is consistent with delivering shareholder value. We have no doubt that it is."
Body Shop's head of investor relations, Angela Bawtree, said the company was trying to maintain a balance between the group's environmentally conscious principles and the interests of shareholders. "Clearly that balance had tipped too far away from shareholders. To some extent this is an attempt to redress that balance." The company admitted that its dividend yield had been poor and its share price had underperformed the market.
The dividend announcement came as Body Shop reported a 2 per cent fall in pre-tax profits to pounds 32.7m with the Body Shop stores in the US continuing to struggle.
Stripping out the contribution of new stores, sales in America fell by 6 per cent last year due to intense competition and the low level of awareness of the Body Shop brand. "Perhaps we haven't been marketing the way we should," Ms Bawtree said. Though sales have continued to fall since March and are down by 6 per cent, she added that Body Shop had increased spending on promotions though much of this is in stores rather than through advertising.
Body Shop has 273 stores in America but will open only 14 more this year as it tries to improve the performance of existing outlets.
The performance in the UK stores was better, with sales up slightly but profits flat. The Body Shop direct concept is performing with home delivery offered in 140 of the 252 UK stores. Only five new UK outlets will open this year. Body Shop has also abandoned plans to start an in-store radio station, saying it would be too expensive.
Asia continues to be the growth market, with the 170 stores lifting like- for-like sales 15 per cent. The increased dividend was 3.4p.