AA slumps as strategy plan hits profit outlook

AA (Frankfurt: A116XA - news) shares have slumped by more than a fifth after it warned on profits and said it planned to pay lower dividends.

The roadside recovery and insurance group was 22% lower in midday trading after a strategy update by its new boss set out details of £45m worth of investment for the current financial year.

It said the additional spending would result in annual underlying earnings in a range of £335m to £345m.

The figure is also expected to take a £12m hit from a "marginal decline" in AA memberships and business customers.

The outlook compares to expected earnings for the year to January 2018 - which will be published in April - of £390m to £395m.

The AA's new strategic plan aims to improve its roadside service, build up use of the AA app, and widen its appeal from a traditional 50-plus demographic to attract younger drivers.

Chief (Taiwan OTC: 3345.TWO - news) executive Simon Breakwell said: "These investments, while reducing our short-term profitability, are vital to our long-term success."

He said the new strategy "will take the AA from a company helping when you break down to one actually predicting when you might break down in the first place".

The company pencilled in falling dividends, with a pay-out of 5p a share for 2017-18 expected to go down to 2p per year in subsequent years "until such time as the board is satisfied that the profit and free cashflow enable a change in policy".

It comes after the AA paid a dividend of 9.3p for the last financial year.

The update failed to rev up enthusiasm among investors, sending the shares to record lows.

Analysts at Jefferies said it was "too negatively skewed on 'show me later' profits".

The AA, formed in 1905 by a group of motoring enthusiasts in London, was floated on the stock market by its private equity backers in 2014. It has more than 15 million members.

Shares (Berlin: DI6.BE - news) have endured a rough ride in recent months. The AA warned on 2017-18 profits in September.