* CEZ proposes CZK 33/share dividend vs previous CZK 40
* Net profit falls 29 percent on weak power prices, outages
* Finance minister says dividend 'not pleasing'
* Company says dividend healthy, supportive for development (Adds finance minister, CFO comments)
By Robert Muller
PRAGUE, March 21 (Reuters) - Czech electricity producer CEZ cut its dividend on Tuesday after reporting a 29 percent drop in annual profits, raising the prospect of a dispute with the finance ministry, its main shareholder, which criticised the decision.
The company proposed lowering its 2016 dividend to 33 crowns a share, or 17.8 billion Czech crowns ($713 million) in total, down from 40 crowns in the previous four years.
Like many rivals, CEZ has struggled with weak power prices, and has also been hit by extended nuclear plant outages in recent years. Adjusted profit, stripping out one-offs, fell to 19.6 billion crowns last year.
Finance Minister Andrej Babis, whose ministry controls the state's 70 percent stake in CEZ, said he was not happy with the planned dividend and that weaker earnings were partly due to "neglect" at the company's most profitable plants.
"This is not caused only by the low electricity price, as it is often stated," he told Reuters in a text message. "CEZ has undergone massive nuclear power plant shutdowns in past years due to neglected welding controls, which caused losses worth billions (of crowns).
"The dividend proposal is not pleasing. I won't comment now whether I will submit a counterproposal."
CEZ, which expects nuclear output to rise by a fifth this year, typically holds shareholder meetings to vote on the dividend in June.
Chief Financial Officer Martin Novak defended the proposed cut in the payout. "We believe (it) is a healthy level of dividend which we are able to offer and at the same time it does not tie up our development," he said.
CEZ also proposed temporarily changing its dividend payout ratio to 60-100 percent of adjusted net income for the next two years - from 60-80 percent previously - while it grapples with industry changes, such as the rise of renewable energy.
The company has slowly started relying more on renewable power and is developing an energy service provider that works with businesses and cities on energy savings and investing into startups like energy storage company Sonnen in Germany to help transform its business.
It sees a further fall in profits this year, with adjusted net profit targeted at 12-17 billion crowns.
The higher estimate includes potential income of 4.8 billion crowns if holders of CEZ convertible bonds redeem the paper in exchange for shares the company has in Hungarian oil group MOL instead of cash this year, it said.
$1 = 25.0440 Czech crowns Additional reporting and writing by Jason Hovet; Editing by Mark Potter