Tesco board’s £550 million dividend decision on a knife-edge

·3-min read

Pressure was on Monday mounting on Tesco to ditch a £550 million dividend due to be paid out this week as the coronavirus outbreak threatens to test its balance sheet.

Covid-19 has so far proved a huge boon to the nation’s grocers as panicked shoppers have stockpiled on food and household items. Industry data last week showed sales are up around 20% across the sector but long-term an almost certain recession threatens to hit revenues.

The board of the UK’s biggest retailer is expected to decide tomorrow on whether to grant the payout, estimated at 5.6p a share or £548 million according to Goldman Sachs. It will be unveiled alongside annual results likely to show pre-tax profits of £1.9 billion on sales of £64.4 billion.

Just a handful of FTSE companies have hung on to their dividends in the race to protect balance sheets from the crisis.

Last week the Bank of England told lenders they should not pay a dividend and questions have also been raised over whether Britain’s insurers should pay out to investors.

Veteran grocery analyst Clive Black, of Shore Capital, said Tesco and its peers had done an “heroic job” of feeding the nation. But he added: “It may be expedient for Tesco to defer its final full-year 2020 dividend until the country and the business has a better understanding of the lay of the land. In doing so, a business that is solvent for sure would also be participating in measures to support liquidity until the dark clouds clear.

“Such a move would not, no doubt, please all shareholders, many of which are losing income left, right and centre, but until there is greater clarity and surety, it may be the wise thing to do, as ‘we are all in this together’.”

Tesco — one of the most widely-held UK stocks — will soon have a healthy balance sheet after last month agreeing the £8.2 billion sale of its Thai and Malaysian arm to local conglomerate CP Group. Tesco pledged to hand shareholders a £5 billion special dividend on announcing the deal, which is yet to be approved by investors. Rival Morrisons last month deferred a special dividend amid the coronavirus crisis.

Independent analyst Nick Bubb said that, assuming the Thai sale goes through, “they should definitely pay the divi”. Bernstein analyst Bruno Monteyne said: “Financially Tesco is well capable of paying its dividend.”

Tesco and its grocery peers have faced criticism for receiving a 12-month business rates holiday — worth £700 million to Tesco — while sales are surging. Chancellor Rishi Sunak handed the relief to all retailers — non-essential retailers have been forced to shut stores.

The Covid-19 crisis appears to be a final huge storm to navigate for Tesco boss Dave Lewis, widely regarded as having saved Tesco after his 2014 arrival upon which he discovered a huge accounting scandal.

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