Every Little Loophole Helps: Criticism as Tesco shareholders reap benefits of stockpiling

October 23, 2020

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What's going on here?

Tesco has declared a midyear dividend of £315m, which has attracted controversy because of the company’s receipt of government support during the pandemic.

What does this mean?

The decision to declare this dividend is controversial because of the government support Tesco recently received in the form of a business rates holiday. Business rates are a tax on the use of non-domestic property, but they were not collected during the pandemic. Tesco was one of the largest beneficiaries of the year-long holiday, estimated to be worth £532m over the financial year.

Tesco’s management is holding firm with their dividend decision. Chairman John Allan insisted that he does not feel “any sort of guilt over it” and is willing to endure any “temporary unpopularity” which results. CFO Alan Stewart added that the dividend was in line with the supermarket giant’s financial policy.

Undoubtedly, Tesco’s finances are in good order. The fact that stores remained open during the pandemic meant that the company enjoyed their strongest performance in years, with an operating profit of over £1bn. In April 2020, the chain evaded controversy when dividends declared during the pandemic related to 2019 profits.

What's the big picture effect?

Essentially, this has created an optics issue for the supermarket chain. The payout reflects badly on a household name that prided itself on “feeding the nation” during the pandemic and has earned major profits from stockpiling shoppers. Equally, it looks greedy for the company to benefit from generous government support and then direct sizeable profits out the backdoor to shareholders. Tesco could have declined the rates holiday, a move which, however noble, would have upset shareholders.

Of course, withholding dividends wouldn’t benefit anyone. In fact, as new CEO Ken Murphy insisted, it would be to the detriment of shareholders, many of whom are pensioners and employees. It’s likely the new boss wanted to avoid beginning his tenure by spooking shareholders. Any disruption to the dividend policy would be reminiscent of the group’s recent accounting scandal. In 2014, misstated profits, reaching £326m, resulted in a major blow to the firm. This current payout could be seen as a reward for loyalty to shareholders who have stuck with the group though choppy financial waters.

Long term, this decision is unlikely to hurt Tesco, who currently enjoy a 27% market share of UK supermarkets. Responding to the dividend declaration, analysts focused on the group’s consistent adherence to policy. HSBC praised the dividend declaration as being in line with a plan that promises to “deliver benefits for customers (through value) and shareholders (through cash)”.

While anger is directed towards Tesco at the moment, it is unlikely to last. Industry competitors have benefited from the same business rates policy, with Morrisons recently announcing a similar dividend payout. Ultimately, criticism should be levelled at the government for upholding a policy rushed in during the pressure of the pandemic. To other industries still struggling, this gift to large companies looks obscene. Is it time for the Treasury to stop pushing the supermarkets’ trolleys?

Report written by Emily Cahill

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