Tesco’s share price has fallen 4.5% this morning but the group still announced a final dividend, despite competitors deferring to save cash
Tesco announce a final dividend despite underwhelming pre-tax profits
- Pre-tax profits came in far below analyst expectations at £1.32bn and approximately 19% below the previous year
- Group has seen expenses associated with Covid-19 rise, for example the additional recruitment needed to meet unprecedented consumer demand
- Despite this, investors will welcome decision made to proceed with 6.5p final year dividend
- Recommendation: With the company continuing to push shareholder distributions hard whilst operating in a crowded market we view the shares as a ‘Hold’
Tesco released results this morning that are set to divide opinion, with shares currently down roughly 4.5%. Pre-tax profits came in far below analyst expectations at £1.32bn, which was expected to be around £1.9bn, and approximately 19% below the previous year. This was largely a result of increased expenses in association with the pandemic where the business sees impairment charges of up to £925m. The primary source of additional cost is coming from payroll as additional recruitment has been required to satisfy the large demand witnessed in the first part of the year. This cost has been partially offset by the increase in food volumes.
After much speculation, investors will be pleased to see that the company have decided to proceed with a 6.5p final year dividend totalling 9.15p for the fiscal year, a 58% increase YOY. The Group also confirmed its plan to distribute £5bn from the Thai and Malaysia operations sale to shareholders, with a further £2.5bn scheduled to be used to reduce pension indebtedness.
In these uncertain times, the critical part of the release today was whether the Group would cut back on their dividend and distributions of the recent sale. However this has not been the case, with the Group offering a final dividend higher than expectations alongside a steady commitment to maintain the £5bn distribution. It appears there are no signs of Tesco taking the foot off the pedal on its dividend distributions, something that will please investors.
In my opinion, this is a somewhat aggressive move by a company who have openly announced a significant uptick in costs associated with the pandemic, defying similar companies such as Morrison who have deferred dividends in an effort to preserve cash. Although the Group has seen a sales surge in the first part of the year driven by the highest industry sales growth in history at 21% in the four weeks to March, the dividend will be met with some criticism around the issue of taking advantage of business rates break, which the supermarkets tend to pay a substantial sum on each year.
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