A CUT in the dividend is expected when Woolworths reveals full-year results this week. Shares in the struggling retailer have lost about two-thirds in value since a demerger from Kingfisher in 2001, but are now yielding a bumper 16%.

A decision on how much to cut the dividend is not expected until later this week, when the board meets, but analysts forecast a drop of more than 50%.

The move comes only days after B&Q owner Kingfisher reduced its dividend by 50%.

Speculation is mounting that Dixons owner DSG International will also cut its dividend payout in view of the deteriorating retail trading environment and need to conserve cash.

A research report by analysts at Credit Suisse in January high-lighted concern at Woolworths’ comparatively high debt levels.

It pointed out that Woolworths’ fixed-charge cover, defined as earnings before interest and tax divided by net interest payments, rent and operating leases, was “very weak” at 1.1 times.

Companies with low cover should, in theory, have less cash available to invest in growth and dividends.

Woolworths’ dividend cut will be announced as it reveals that its high-street stores have returned to profit, reversing a £13m loss the previous year. But analysts question whether the recovery will last in one of the toughest trading environments since the 1990s recession.

Nick Bubb, analyst at Pali International, said last week that Woolworths’ recovery had been aided by property deals with landlords. “There is a big element of property in this so-called return to profitability. It may continue as a source of revenue but, given the pressure on the top line, they may well fall back into loss later this year,” he said.

Despite City scepticism about the sustainability of the recovery, the return to profit for the stores arm is expected to pave the way for a break-up of the Woolworths group in the medium term. It is likely to consider a range of options for its 40% stake in 2entertain, a publishing joint venture with BBC Worldwide, which could be worth £200m.

Unity, the investment group backed by Icelandic investor Bau-gur, controls a 10% stake in Woolworths and is said to have been pressing for a break-up for almost two years.

City watchers believe that Bau-gur has become increasingly frustrated by the poor performance of the high-street stores and would like to see the group broken up and taken private.

Woolworths is tipped to report profits of between £25m and £32m, up from £21.8m the previous year.

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