Tesco shares fall on dividend cut fears

18th Aug 2014 15:08

Tesco's share price was under pressure on Monday as investors expressed concerns with the sustainability of its dividend after a major shareholder suggested that the company should slash its payout.David Herro of Harris Associates, which owns a 3% stake in the UK's biggest retailer, told The Sunday Times: "In general, dividends should be covered by free cash. This is not the case with Tesco."He said that the company needs to either cut its dividend or generate positive cash flow. "[The dividend] should be cut if it's paid for by borrowing," Herro said.Shore Capital analysts Clive Black and Darren Shirley said in a research report that they see a "reasonably high probability" that Tesco will cut its dividend by 25-50%.Meanwhile, Garry White from Charles Stanley said that "the debate is starting to move toward when, rather than if, a re-basing of the payment will take place". White said that Tesco's new boss Dave Lewis could decide to 're-base' the dividend on his first day as chief executive on 1 October - the same day the retailer reports its interim results - or wait until full-year numbers on 22 April 2015."Of course, he may also decide that there is no need for a cut in the payment to be made - although this would be a significant positive surprise in the Square Mile," he said.The stock was was down 0.7% at 246.3p by 14:20.BC