Jeremy Warner: Dividend cut highlights M&S board's failings
Wednesday 20 May 2009
Outlook What a shame the dividend decision at Marks & Spencer doesn't conform with the slogan of its transformation programme – "doing the right thing". Directors have done very much the wrong thing in slashing the dividend by a third, but please don't call it a cut. Rather, this is simply a question of "re-basing" so as to provide "a stronger foundation for moving forward". OK, so these things are in the end a matter of judgement and Sir Stuart Rose, the chairman, may be right in thinking he was damned if he did and damned if he didn't. If he'd held or increased the dividend, he might have been accused of hubris and recklessness. But somehow I doubt it, and there was evident disappointment in the stock market yesterday, where, after an admittedly good run, the shares fell back by nearly 10 per cent.
M&S is, above all, an income stock, particularly for its army of small shareholders. If savings have to be made, they should come elsewhere, for instance in further reductions in working capital. The group should be leaning over backwards to protect the dividend. Instead, it has chosen to use the maelstrom of dividend cuts going on elsewhere in corporate Britain – many of them not just a question of "won't pay" but "can't pay" – as a smokescreen for its own much more questionable cut.
The outlook for both consumer spending and M&S profits is still uncertain. There seems to be an appetite for a consumer-led revival, with confidence surveys trending sharply upwards and retail spending much more robust than the doomsayers would suggest. But with rising unemployment and a still substantial overhang of consumer and mortgage debt yet to be worked off, no one knows whether this more optimistic mood will last.
Last year's collapse in profits was back-end loaded, so on the reduced run rate now established, it seems quite likely there will be be a marked overall reduction again this year. All the same, we do seem to have reached some kind of a bottom.
The company thinks it prudent to get dividend cover back to two times earnings from this year's 1.6, before thinking how to rebuild payouts, but you have to wonder how relevant these parameters are. M&S appears to be under no particular pressure from its bankers. Indeed, it succeeded in sharply cutting its net debt last year and, as far as is known, there is no danger of a breach of covenants. In any case, it seems reasonable to wonder whether a more aggressive and hair-shirted approach to costs, investment and margins might not have delivered the headroom necessary to pay a maintained dividend.
The dividend cut also raises afresh the old question of whether Sir Stuart has really delivered the turnaround at M&S he claims, or if underlying problems remain. M&S made its name as a value retailer of high quality but mass market attire. Today, there are any number of high-street rivals offering much the same, together with perfectly adequate discount propositions such as Primark for getting your socks and undies from. During his tenure, Sir Stuart has produced a number of wins, not all of them easy, but has he in any meaningful way addressed the fundamental problem of M&S's relevance to the modern world? To me, it still looks and feels much the same as it always did.
M&S claims to have held market share in clothing; some rivals challenge this assertion. Given the difficulty M&S seems to have in tackling costs, its plans to limit margin erosion from the weakness of sterling to just 125-175 basis without raising prices look questionable. And won't that put further pressure on the top line? Whatever the answer, the dividend cut will only fuel the concerns of those in the City who have argued that Sir Stuart should never have been allowed to combine the role of chairman and chief executive.
These are tough times, but they should not be allowed to disguise what may be continued management failings at the one-time doyen of British retailers. Shareholders should not meekly accept a dividend cut that saves a comparatively modest £120m a year. If such a sum makes the difference between life and death at M&S, things must indeed be serious. Better explanations are required.
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