Should Tesco be paying a dividend after receiving nearly £600m of state support? It’s complicated

Should Tesco be paying a dividend?

Outside the blizzard of eye-popping numbers the supermarket released alongside its annual results – including sales of baked beans doubling and those of liquid soap jumping by a staggering 363 per cent – this was the perhaps the biggest point of debate.

And… it’s complicated.

Tesco’s final payout, more than the City had forecast at 6.5p, will cost it more than £600m out of a total of more than £900m that it has this year pumped into its shareholders’ coffers.

CEO David Lewis was at pains to stress, during the media conference call, that it was being paid from surplus capital generated last year, surplus to what the company needs to “keep Britain fed” this year. During which time it’s receiving, oh that’s right, £585m of state support in the form of a business rate holiday.

It should be stated that, Tesco, Britain’s biggest grocer, isn’t going to make pots of cash from the crisis, even in the wake of the panic buying that resulted in all those baked beans, bottles of liquid soap and also cans of tomatoes (up 115 per cent) flying off the shelves.

That’s settled down, and while sales have received an ongoing boost because people are at home and aren’t eating out, or even buying sandwiches for lunch, it’s been partially offset by general merchandise (clothes etc) and fuel executing a high dive. It also bears repeating that the sort of every day staples that remain in high demand are, as a rule, lower margin products.

Tesco will still do just fine this year, far better than most retailers. And that means more dividends, even with the company coping with a sharp rise in costs through taking on a small army of new, mostly temporary, staff and (commendably) both paying those who are isolating and having vulnerable staff stay home. Those costs could reach £925m, the majority through an increased payroll. You should expect the payout to therefore be at a somewhat lower level.

The question it nonetheless begs is this: while some businesses, and the people they employ, clearly need the state support that’s on offer (without which they’d be doomed), Tesco does not. So should we all be paying for it, through higher taxes and/or reduced services or higher interest bills on the national debt? Is it right that the taxpayer is making a contribution, if not to this year’s payout then to next year’s?

Lewis was on better ground in defending the dividend not in terms of “surplus capital” but by making the point that the payment is relied upon by pension funds and small savers.

He could also have cited charities, including institutions such as, say, the Wellcome Trust.

The UK’s largest non governmental funder of scientific research has just launched a “Covid-Zero” initiative aiming to help raise at least $8bn (£6.4bn) by the end of April to cover a global research funding shortfall for coronavirus vaccines, treatments and testing.

Wellcome is funded through a foundation, which relies on the performance of its investments, of which dividends will be a part.

The reason these payouts have sometimes served as a convenient whipping boy for the problems with the capitalist system, and the way it operates in the UK, is partly down to the fact that many privatised utilities, some with monopolies (water companies for example), prioritised increasing them over doing things such as fixing leaks and improving services.

Tesco’s payment, and those of others such as Legal & General, which has thumbed its nose at the Bank of England in maintaining its dividend because it too believes it has surplus capital even with the potential strains its business may face, aren’t in the same category.

I suppose one benefit of that state’s largesse is that the state is now entitled not just to say “play nice” with staff (as Tesco is doing) but to insist upon it and to ask for other help if needed.

But even so, the optics aren’t great, and the decisions that have been taken are at the very least open to question.

They will filter through to a conversation that’s started to be had about big businesses, the roles they play in society and the ways in which they are managed.

The debate is a timely one.