Tesco holds dividend but cautious outlook disappoints

Pretax profit for the year to the end of February fell 20% to £825m from a year earlier as sales excluding fuel rose 7% to £53.4bn. Analysts had expected pretax profit of £891m. Operating profit before exceptional items and amortisation fell 28% to £1.82bn, beating expectations for profit of £1.73bn.

Sales were powered by an 8.8% increase in the UK and Ireland to £48.8bn, more than offsetting a 2% drop in central Europe and a 31% decline at Tesco Bank.

The FTSE 100 group proposed a final dividend of 5.95p per share taking the annual payout to 9.15p - the same as a year earlier. Tesco said the annual dividend was higher than its policy allowed, reflecting its confidence in future cash flows.

Ken Murphy, Tesco's chief executive, said: "Our decision to protect and hold the dividend flat for this financial year demonstrates our commitment to shareholders. We believe we can create significant further value for them and every stakeholder in our business by continuing to focus on value, loyalty and convenience for customers, underpinned by strong capital discipline."

Tesco said it expected a strong recovery in profitability and free cash flow because most of the extra costs caused by the pandemic will not be repeated. Some extra UK sales will fall away but this will be more than offset by lower costs, the group said.

The company said its best estimate was that retail operating profit would be similar in the current year to 2019/20, before the pandemic affected performance. Tesco said it would maintain capital discipline and return excess cash to shareholders.

Supermarkets' sales boomed during the Covid-19 crisis as households were forced to eat and drink at home. But grocers were also forced to hire extra staff to meet demand and cover sickness as well as spending on protection measures.

Tesco shares fell 3.2% to 224.6p at 08:31 BST as shareholders were underwhelmed by Tesco's cautious outlook statement.

Nicholas Hyett, an analyst at Hargreaves Lansdown, said: "The underlying positives haven’t been enough to boost the share price this morning, and we suspect that’s due to relatively lacklustre guidance … suggesting that while the pandemic hasn’t done the group much harm, a year of captive shoppers hasn’t done it much long term good either.

"We suspect that may turn out to be an overcautious forecast, but as things stand it has clearly left the market disappointed."