Speculators are taking a £400m bet on more stock market pain for Tesco and the beleaguered supermarket is vulnerable to further attacks in the wake of its dividend cut, financial experts have warned.
The company’s new chief executive, Dave Lewis, begins work today on a rebuilding job for the UK’s biggest grocer, having cancelled his holiday to start a month early. But according to the financial data provider Markit, the supermarket now has 1.9 per cent of its stock worth $654m (£393m) on loan with short-sellers betting on its share price – already at an 11-year low – to fall.
Markit’s figures came as it emerged that one of Tesco’s biggest shareholders, the US investment fund Harris Associates, has sold two-thirds of its stake in the business in recent months because the supermarket was becoming “too risky”.
The UK’s former retailing powerhouse is limping after its second profit warning in as many months as the discounters Aldi and Lidl squeeze its market share and the “big four” supermarkets – Tesco, Asda, Morrisons and Sainsbury’s – fight a price war.
Tesco’s board, led by Sir Richard Broadbent, has slashed capital spending by £400m this year and the interim dividend by 75 per cent, which makes it particularly vulnerable to further short-selling attacks, according to Markit analyst Simon Colvin.
Investors betting against a company borrow shares from institutional investors to sell them, in the hope of buying them back more cheaply later and banking the difference as profit. But when they do so they are still liable for the dividend payments to the original owners, so a lower dividend is a bigger incentive for short-sellers to move in, according to Mr Colvin.
He said: “Tesco has traditionally been a dividend stock. The dividend is like a shield from short-sellers. The cost of being a short-seller of Tesco is now a lot cheaper than it was. It’s hard to say what will happen now but if you are going short the barriers are now much less daunting.”
Short-sellers will have to cover an interim dividend of just 1.16p following the board’s swingeing cuts. The increasing woes of Tesco under former chief executive Philip Clarke have seen the proportion of the firm’s shares on loan more than treble from just 0.6 per cent in August last year.
Tesco’s new boss faces an urgent task in overhauling its management and coming up with a strategy to beat off the discounters eating into its market share.
The grocer also has a new finance director to bed in after poaching Alan Stewart from Marks & Spencer.
According to Markit, 12 per cent of Sainsbury’s shares are on loan – a 17 per cent rise in the last month alone. Morrisons, whose boss Dalton Philips is under pressure after two profit warnings, has more than 8 per cent of its stock on loan with short-sellers.