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Tesco resumes dividend payments as fatter margins fuel H1 profit

Tesco Plc on Oct. 4 announced its first dividend payment for shareholders in three years as it reported better-than-expected earnings for the fiscal first half of 2018 and reaffirmed its medium-term targets.

The U.K.'s biggest supermarket operator by revenue said the dividend of 1 pence per share was a sign of the company's improved performance and the board's confidence. Tesco has not paid a dividend since its interim results in fiscal 2015.

This comes as Tesco reported that profit before tax in the six months ended Aug. 26 soared to £562 million from £71 million in the same period a year earlier as its profit margin swelled. Diluted EPS climbed to 5.21 pence from 0.42 pence. S&P Capital IQ consensus estimates forecast pretax profit of £423.50 million and normalized EPS of 4 pence.

Operating profit accelerated 71.8% year over year to £885 million from £515 million, fueled by a jump of 50 basis points in operating margin to 2.7% from 2.2% a year ago.

Tesco reported strong performances across all geographies. Operating profit in the U.K. and Ireland, its largest market, gained 21.1% year over year to £471 million from £389 million.

Revenue increased 3.7% year over year at actual exchange rates to £28.35 billion, ahead of a consensus estimate of £28.17 billion. Like-for-like sales were ahead 0.8% despite an 8.3% drop in Asia, which Tesco attributed to a reduction in discounting.

In the U.K., where Tesco is the leading grocery retailer, the company has focused on maximizing its product mix to drive volume. It improved profitability by cutting back on promotions and increasing the proportion of full-price sales. Market conditions had been challenging due to inflationary pressures, the company said, but it worked with suppliers to minimize price increases to customers.

"Apart from the poor sales in Asia [attributed to reduced discounting], there's not a lot to pick holes in, and the City should be pleased with the news first thing," independent retail analyst Nick Bubb said in an Oct. 4 note.

In early trading on the London Stock Exchange the day of the report, Tesco shares traded down 3.40 pence, or 1.8%, at 186.65 pence. They are down about 10% since the start of 2017.

Tesco said it remained "firmly on track" to meet targets set out in October 2016 to generate £9 billion of retail cash from operations and to improve operating margin to between 3.5% and 4% by fiscal 2020.

"What we are demonstrating today is that we are doing exactly what we said we would do," CEO Dave Lewis said during a media briefing after the results were released.

Net debt on Aug. 26 stood at £3.3 billion, down from £4.4 billion a year earlier and less than half the level of £8.5 billion at the end of fiscal 2015. That year, Tesco launched a restructuring plan to improve its growth after momentum faltered in the face of intense competition, especially from discounters Lidl Dienstleistung GmbH & Co. KG and ALDI Einkauf GmbH & Co. oHG. It booked a fiscal 2015 pretax loss of £6.4 billion and suspended dividend payments.