Metcash shares have plummeted to their lowest level in 14 years after the grocery wholesaler shocked investors by suspending its dividend payments after making $640 million worth of writedowns.
The company said it wouldn’t pay a dividend in the next 18 months as it tries to beef up its IGA store network to better compete with larger supermarket rivals Coles, Woolworths and Aldi.
It also unveiled $640 million in writedowns and charges, which is set to result in a large bottom line loss when it announces its full year results on June 15.
Metcash posted a $169 million net profit last financial year, so the $640 million hit will result in a large loss on its bottom line when it reports full year results on June 15.
However, the writedowns are largely to goodwill and other intangibles and the wholesaler has reaffirmed its full year guidance for underlying earnings of between $315 million and $330 million.
Investors chasing the company’s high dividend yield – which was above 11 per cent based on last year’s distribution – immediately jumped ship following the announcement.
Metcash shares dived 24.5 cents, or 17.69 per cent to $1.14, a level not seen since 2001.
Bell Direct equities analyst Julia Lee said the move was a cautionary tale to yield-hungry investors.
“I think it’s a good demonstration of what happens when you see phenomenally high yields on the market without the earnings growth coming through,” she told AAP.
But the decision to suspend the dividend received the backing of company’s biggest shareholder, fund manager Allan Gray Australia.
Alan Gray chief investment officer Simon Mawhinney said the move was necessary to strengthen Metcash’s balance sheet and give it a chance of surviving in the longer term.
“It’s not often you see management make these long-term decisions,” he said.
“Anyone from a mile out would have been able to see that this would have been poorly received by the stock market, yet they’ve gone and done it and I think it’s the right thing.”
Metcash is in the midst of a $480 million overhaul of its operations as it looks to improve the quality of its stores to better compete with the major supermarket brands.
The expansion of German retailer Aldi in Australia is making life increasingly difficult for the local chains, and IGA is looking more vulnerable than its larger rivals.
Concern about the growing price war among supermarkets, combined with weaker sales and profit results, has seen Metcash’s shares have more than halve in the past year.
But Mr Mawhinney said the company’s efforts to invest in its operations would give it a decent shot at a turnaround.
“It’s not a slam dunk, people don’t like it and for good reasons but I think the company presents itself warts and all and either they can turn the ship around or they can’t but I think they are in with a fair chance.”