* Cuts dividend in half, forecasts drop in earnings
* Full-year earnings of 304 mln pounds miss company guidance
* New exec chairman Dunstone to focus on customer growth
* Shares fall 10 pct (Adds further quotes, analyst reaction)
By Paul Sandle
LONDON, May 10 (Reuters) - TalkTalk founder Charles Dunstone said earnings would fall this year and halved the annual dividend to help fund measures designed to return the broadband provider to its roots as the low-cost challenger to BT, Virgin and Sky.
Dunstone, who took on the role of executive chairman this month and owns around 31 percent of the company, set out the scale and cost of the task ahead and made his priorities clear.
“My focus for the company is growth, cash generation and profit – in that order,” he said.
Shares in the group fell as much as 17 percent to a five-month low of 151 pence, and were trading down 10.7 percent at 1015 GMT as analysts said the cost of Dunstone’s strategy had wrongfooted some investors.
“To hold TalkTalk shares it is necessary to believe in a new strategy focused on retail broadband, cutting out the mobile distraction,” said analysts from Jefferies who have an “underperform” rating on the stock.
“But regaining a ‘challenger’ edge without cutting prices could prove too difficult,” they added.
Dogged for years by a reputation for poor service, progress made by former Chief Executive Dido Harding, who left last month, was undermined by a high-profile cyber attack in 2015.
Under Harding, TalkTalk sought to emulate its bigger peers by offering the full package of broadband, fixed-line, TV and mobile which had helped the telecoms industry to grow in recent years.
But Dunstone and new Chief Executive Tristia Harrison said they would scale back the company’s ambitions in mobile, reviewing the plans it had agreed for a more comprehensive partnership with Spain’s Telefonica.
Harrison said the company was continuing to work with Telefonica on creating the right product. An original, more basic partnership with Vodafone will continue.
TalkTalk, focused on the lower priced end of the market, missed its own earnings target for the year to the end of March, the figure coming in at 304 million pounds ($394 million), up 17 percent but short of its own 320-360 million guidance.
Dunstone, who created TalkTalk in 2003 as an offshoot of his Carphone Warehouse retail group, said the shortfall was partly caused by the costs of acquiring new customers for its simpler broadband packages.
“I think it’s the first time in three years that we have actually grown our own residential customer base,” he said in an interview.
“That’s just going to set a trend for what you are going to see from us going forward, which is a much more aggressive approach to growing TalkTalk.”
TalkTalk reported a 22,000 rise in its customer base in the last three months of its last financial year. Churn, or the percentage of customers leaving, fell to 1.4 percent from 1.64 percent in the previous quarter.
Dunstone said it was “prudent and sensible” to cut the dividend to invest in growth.
“We want to run the business in a very financially disciplined way and get our dividend cover up,” he said.
The group cut its final dividend to 5.0 pence from 10.58 pence a year ago, and said dividends would only return to growth when earnings did.
Core earnings for the year to end-March 2018 were forecast to come in the range of 270 million pounds to 300 million pounds, around 11 percent below consensus, reflecting the higher cost of acquiring new customers, it said. ($1 = 0.7717 pounds)
Editing by Costas Pitas