Tesco profits rise to £2.2bn but sales growth slows

Tesco has bowed to shareholder pressure and pledged to hand more cash back by releasing up to £5bn from its £24bn-plus property estate over the next five years.

Despite the change of tack, which will see Tesco ratchet up its dividend payment for the first time in three years, its shares fell, reflecting disappointment at the group's weakest sales growth in four years.

Sir Terry Leahy, the chief executive, said stronger rivals and cautious shoppers had held back Tesco's growth, admitting: "We're not necessarily the fastest-growing [supermarket group] at the moment." Like-for-like sales growth of 7.5 per cent in the 12 months to 25 February almost halved to 4 per cent in the final seven weeks, suggesting January sales were broadly flat. Tesco shares slipped 1 per cent to 323.25p.

Tesco said it would seek more joint-venture deals with property companies to raise cash from its stores, 85 per cent of which are freehold. It will use £1.5bn of its targeted £5bn cash pile to buy back shares to offset the dilutive effect of issuing share options. The remaining cash will either fund its ambitious UK and overseas expansion - its capital expenditure will soar to almost £3bn this year - or be returned to shareholders.

David Reid, the chairman, said one in four of Tesco's investors had "signalled they would like to see us deliver for shareholders in the same way as we deliver for our customers". After spending the past three years building its dividend cover, the group plans to increase dividends in line with its earnings growth, he said.

Tesco owns freehold sites worth about £24bn at market prices, although its stores are in its books at £15.9bn. It has done a number of sale-and-leaseback deals with property companies in the past, limiting its exposure to rent reviews by agreeing any increases beforehand.

It announced its property plans alongside full-year results that showed pre-tax profits rose 17 per cent to £2.25bn on sales up 13 per cent at £41.8bn. Tesco held its operating margin at 5.7 per cent despite cutting prices in stores by 2 per cent and absorbing £100m of extra costs, an increase of 60 per cent.

Stressing that Tesco was still a "growth" company, Sir Terry said the group had big plans to expand its non-food sales, which rose 13 per cent last year to £6.8bn. It is investing in a new distribution facility to house a "wider range" of products, starting with "hard lines", the chief executive said. Five more Homeplus stores, which stock only non-food lines, will open along with 28 more of its giant Extra hypermarkets.

It opened 2 million sq ft of new space in the UK last year, or 118 stores, and is to open 142 more this year, including 130 of its mini Express stores, giving it more than 2,000 UK stores.

The group announced it would spend £100m on improving its environmental credentials, as part of a "multi-pronged" plan to overhaul its battered corporate image. It also wants to halve its energy use by 2010 by using more renewable energy, including converting food past its sell-by date into energy.