Tesco has defended plans to pay a £315m dividend to shareholders at a time when the supermarket chain is benefiting from a business rates holiday worth £249m.
The UK’s biggest retailer reported a 4% increase in operating profits to £1.2bn in the six months to 29 August, as booming food sales coupled with the tax break helped offset a £533m bill for extra staff and safety measures in its stores.
Alan Stewart, the finance director of Tesco, said the board decided that paying dividends was the “right thing to do” for shareholders.
Over a full year Tesco said its Covid-related costs would add up to £725m while the rates relief – which was introduced by the government to help bail out retailers banned from trading in lockdown – would be worth £532m.
The half-year dividend Tesco is paying out is 20% bigger than in 2019.
“We have incurred very, very significant extra cost in running the business in the year,” said Stewart. “It is against a backdrop of keeping people fed and supporting government initiatives against the vulnerable, that the business’s performance should be measured.”
The major supermarkets have all reported strong sales since the pandemic began. Last month Morrisons said it was also paying a dividend. Sainsbury’s is yet to decide whether to make a payout based on last year’s earnings.
Positive Money, a campaign group, criticised the Tesco move. Fran Boait, its chief executive, said: “There needs to be conditions to ensure that any company receiving public support in a time of crisis isn’t wasting money on paying out dividends to wealthy shareholders.”
The New Economics Foundation thinktank said the money from business rates was used by local government to fund the vital local infrastructure needed for Tesco stores to function, such as refuse collection and the bus services that workers use to get to work.
“For Tesco to accept this relief, and then be able to turn around and pass the benefit straight on to shareholders, shows that the system is not fit for purpose – public funds should not be captured as private profit,” said senior economist Sarah Arnold.
However, the dividend decision pleased the City. Richard Hunter, head of markets at Interactive Investor, said the cash would be welcomed by investors “given the dearth of payouts at present”.
“The increase is a healthy sign of confidence from the company in its prospects,” he said. After an initial rally the shares closed marginally down at at 213p.
Tesco said UK food sales climbed more than 9% in the period as the pandemic triggered big changes in shopping behaviour. Sales in its convenience stores were up 7.6%. In large stores, Tesco said sales grew by 1.4%, as customers made fewer trips but bought more on each visit. The average “basket size” – the amount spent by shoppers per visit – increased by 56%.
The biggest change was Tesco’s online business, where sales grew at 90% over the summer months. The boom reflects the rapid expansion of the delivery service with the number of slots doubling to 1.5m a week.
The retailer said the pandemic had hit the performance of its bank as it issued fewer loans and credit cards, and set aside more money for bad debts. This resulted in an operating loss of £155m, down from a profit of £87m last year. The bank’s performance pulled down overall group operating profits by 16% to £1bn.
The update was the first outing for Ken Murphy, who last week succeeded Dave Lewis as the chief executive of the UK’s biggest retailer. The Irishman had previously spent 25 years in senior positions at the Boots owner, Walgreens Boots Alliance.
Murphy said he was “really happy with the strategy and the direction of the company”. He added: “As far as I’m concerned my job is to maintain momentum in the business.”
