ii view: Tesco's £5 billion special dividend

Proceeds from the sale of the supermarket's Asian business are now to be returned to shareholders. 

Third-quarter and Christmas trading updates

• UK like-for-like (lfl) Christmas sales up 8.1%
• Total sales over the combined periods up 7%
• Total lfl sales for the combined periods up 5.6%
• Full-year 2020/21 profit guidance unchanged

Chief executive Ken Murphy said:

“We delivered a record Christmas across all of our formats and channels.  In response to unprecedented demand for online groceries, colleagues delivered over seven million orders containing more than 400 million individual items over the Christmas period.  We're now supporting 786,000 vulnerable customers with priority access to online slots and, as lockdown measures continue, we'll keep doing everything we can to ensure everyone can safely get the food and essentials they need.

“Our colleagues went above and beyond, rising to every challenge in the most exceptional of circumstances and I thank every one of them for this.  We're in great shape to keep delivering in 2021 and beyond."

ii round-up:

Tesco (LSE:TSCO) employs over 400,000 people across stores and distribution centres in the UK, Ireland and Central Europe. 

The Hertfordshire headquartered company generated revenue of over £60 billion and operating profit of more than £2.5 billion during 2019. It also owns wholesaling business Booker, along with Tesco Bank.

For a round-up of this latest trading update, please click here. 

ii view:

Over recent years, the UK’s biggest supermarket by sales has undergone drastic change. Product ranges have been scaled down to aid buying power and competitiveness with discounters Aldi and Lidl. Lower prices have also raised pressure on rivals Morrisons (LSE:MRW) and Sainsbury's (LSE:SBRY). Former Walgreens executive Ken Murphy is now in charge and hopes to build on the transformation undertaken by the previous CEO Dave Lewis. A previous expansion overseas has also now been reversed. Following the recent £8.2 billion sale of its Thailand and Malaysia businesses, the grocer now plans to return £5 billion to shareholders via a special dividend, having already contributed £2.5 billion to its staff pension scheme.

A circular containing further details of the special dividend and the associated share consolidation ratio will be sent to Tesco shareholders on or around 25 January. The money is expected to be returned on or around 26 February.

For investors, an increase in full-year estimated UK Covid-19 costs to £810 million from £725 million demonstrates the pandemic headwind it faces. So does an unchanged loss estimate of up to £200 million for its banking business. 

But a more focused Tesco in both product and geographical terms looks better placed to fight the competition. Christmas online sales growth of 80% also serves to underline the retailer’s strength in the virtual world. Meanwhile, a one-year forecast dividend yield of over 3% and the pending payment of a special dividend are not to be overlooked in this ultra-low interest rate era. For now, and with its strategy firmly reset, Tesco continues to enjoy investor support.

Positives

• Growing online sales 
• Attractive dividend payment (not guaranteed)

Negatives

• Tesco bank sales down 27.7% hit by the pandemic
• Industry competition remains intense

The average rating of stock market analysts:

Buy