By Silke Koltrowitz and John Revill
ZURICH (Reuters) - Swatch Group cut its dividend after weak sales and high fixed costs at the world's biggest watchmaker drove annual profit sharply lower, although it held out the prospect of a return to "healthy growth" this year.
Swiss watchmakers have been hurt by declining sales in their biggest markets, Hong Kong and the United States, and tourist shoppers avoiding Europe for fear of extremist attacks, but recently mainland China sales turned the corner.
"Based on the positive development of the last three months, healthy growth is expected for the year 2017," the company, based in Biel in western Switzerland, said in a statement on Thursday, pointing to a turnaround in mainland China over the last three months.
Net profit at the maker of Omega and Longines watches slumped 47 percent to a worse-than-expected 593 million Swiss francs ($598.9 million), reflecting the company's reluctance to cut costs. The operating profit margin slid to 10.7 percent, from 17.2 percent.
Some investors have been critical of Swatch CEO Nick Hayek for the reliability of his forecasts and a plan to expand into launching a battery for electric vehicles.
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Swatch's fixed costs are high because it has to supply watch movements to the industry and because, unlike rival Richemont, it has so far refused to cut jobs in watch production.
"Personnel expenses were down 2 percent, but other expenses were up 3 percent implying limited cost measures during 2016," Vontobel analyst Pascal Furger said, confirming his "Hold" rating on the stock.
The group cut its dividend to 6.75 francs per share, from 7.50 francs in 2015, the first reduction since 2009.
ZKB analyst Patrik Schwendimann said this was "unnecessary given their strong cash reserves."
Shares, which have risen over 10 percent so far this year on hopes of a market recovery, were down 0.5 percent at 0945 GMT, paring earlier losses, but still lagging a 0.15 percent higher European sector index.
Sales at constant currencies fell 10.8 percent to 7.55 billion francs, mirroring a 10 percent decline in Swiss watch exports in 2016.
Europe remained difficult due to the slump in tourism, but the situation at Hong Kong watch retailers improved and mainland China saw over 20 percent growth "in recent months", Swatch said.
Bernstein's Mario Ortelli said he believed the improvement trend would continue, especially given the very easy comparables, but not "enough to justify the decision of the Swatch Group to not decrease the production capacity". ($1 = 0.9902 Swiss francs)
(Editing by Keith Weir)