(Bloomberg Opinion) -- One well-known British retailer says it has noticed a marked upturn in customers saying “Thank you” to store staff since the start of the Covid-19 crisis. Investors in another — Tesco Plc — will be doing the same after it said it would pay out 635 million pounds ($783 million) in final dividends, taking its distribution for the full year to about 900 million pounds.
Britain’s biggest retailer has every right to reward its shareholders. After all, unlike many companies crippled by the virus lockdown, it is doing well. The supermarket operator has come through the dark days of 2014 when it discovered a 250 million-pound profit shortfall, and made one of the biggest losses in British corporate history.
Tesco on Wednesday announced underlying operating profit of just below 3 billion pounds in the year to Feb. 29, 2020, and said it generated just over 2 billion pounds of free cash flow. Net debt, including lease liabilities, has come down from 22 billion pounds as of February 2015 to 12.1 billion pounds. That means it has no immediate need for extra cash, capital or liquidity.
The rub is that Tesco is accepting coronavirus-related relief from the government in terms of the 12-month holiday from business rates to the tune of 585 million pounds. This is the property-based tax that Tesco Chief Executive Officer Dave Lewis and others have argued unfairly penalizes retailers with big store estates, and lets online competitors get off lightly.
Across Europe, companies have been under pressure to scrap payouts in order to preserve cash or in some cases to access government aid. More than a sixth of firms in the benchmark Stoxx 600 Index have canceled or delayed dividends.
Tesco says any saving from the U.K.’s business rates will be outstripped by the extra costs it will incur to keep its stores open and treat employees well throughout the pandemic. It predicts that they will ring in at a minimum of 650 million pounds, or as much as a worst case scenario of 925 million pounds of additional expense.
This includes everything from providing full pay to sick employees, paying staff a 10% bonus, recruiting 45,000 new workers and transferring others to where they’re needed most, as well as making changes to stores, such as installing screens to protect cashiers working the check out lanes. Extra labor costs in stores and distribution centers will account for between 415 million and 580 million pounds.
So far, Tesco hasn’t accessed any other government support. It has continued to pay its VAT bill for example.
And panic-buying ahead of the U.K.’s lockdown hasn’t benefited all of its aisles. While Tesco has enjoyed an uplift in food sales, which rose about 30% in the first few weeks of the crisis, clothing and fuel sales are down about 70%. Within Tesco stores, food is notoriously low margin. The drop in demand for higher-margin furnishings and fashions, together with the higher costs, will have an impact on profit in this fiscal year.
Tesco says that as well as its staff, it is thinking about its investors — and there is likely to be some significant overlap between the two. For several years after Tesco’s own crisis, its shareholders lived without a payout. The company has been gradually rebuilding its dividend since February 2018.
The trouble is, consumer groups’ reputations will live or die by their response to Covid-19, and Tesco could have handled this differently.
One option would have been to simply defer the dividend. It could have been distributed at Tesco’s interim results in October, when feelings may not be running so high, or paid as a special dividend in 2021. After all, shareholders are already set to receive an exceptional dividend of 5 billion pounds from the sale the group’s Thai business, which it still expects to complete in the second half of this year.
Tesco, along with Britain’s other big grocers, have done an admirable job in continuing to supply food, but also absorbing workers who have been laid off from other industries. It would be a shame if this was overshadowed by the dividend decision.
A little more imaginative thinking from the Tesco board could have enabled both customers and shareholders to say, “Thank you.”
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.
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