Tesco counts costs of sales surge, and insurers bow to pressure on dividends

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“After a decent little run the FTSE 100 is lower today although this looks more of a slight stumble compared with the some of the big trips we have seen since the coronavirus outbreak took hold,” says AJ Bell Investment Director Russ Mould.

“The mood wasn’t helped by the fact that US stocks couldn’t hold on to gains. The markets do seem to want to be positive about the outlook but there is still considerable uncertainty about the progression of the virus and how countries might exit the lockdown measures which are having such a punishing impact on their economies.

“Difficulties in agreeing a support package for the Eurozone show how tough it could be to deliver the co-ordinated action required across the globe to mitigate the impact.

“Commodities, notably crude oil, were also lower with Russia and Saudi Arabia seemingly no closer yet to ending what feels like spectacularly ill-timed price war."

Tesco

“The latest results from Tesco are a reminder that the surge in demand (or less politely panic buying) which the supermarkets have seen in recent weeks has significant costs as well as benefits.

“Eye-catchingly these costs, of recruiting and training new staff and bringing on additional delivery capacity, could ultimately total close to £1 billion – though they may be offset by business rate relief, ‘prudent management’ and an uplift in sales.

“Growth is only really relevant if it is profitable and the 30% surge in sales in recent weeks may have been more of a headache than the boost it might superficially have appeared to be.

“The company’s banking operations also look set to be a drag on the group in the year ahead with interest rates on the floor and the likelihood of an increase in bad debts thanks to the coronavirus hit to the economy. The wider business will not be immune to this either as consumers likely dial back their discretionary spend.

“There is some comfort food for investors as the dividend looks set to be maintained and is actually a bit ahead of what was expected. Departing CEO Dave Lewis also hit his margin target for the year to February too.

“And Tesco is still better placed than many other businesses as demand for the food and essentials will continue through the current period of economic stasis.”

Insurers

“If income investors were hoping they could rely on the insurance sector for dividends, after Legal & General recently resisted regulator pressure to cancel its own payout, they have now had a rude awakening.

Aviva, RSA, Hiscox and Direct Line are taking more than £1 billion combined off the table today. It seems likely Legal & General, looking more and more the outlier, will have to follow suit.

“While the banks would have a weak case for continuing dividend payments given their history and the state support they required during the financial crisis. Insurers did not require propping at the time and most can point to robust balance sheets now.

“In theory the insurance sector shouldn’t be subject to the same erosion of revenue seen in other sectors. Premiums should continue to flow as people will still have to insure their cars, homes, businesses and lives through the coronavirus crisis.

“However, the level of claims that will come through is hard to quantify at this point. It would not be a good look for the industry to be taking a very hard line with its customers while continuing to pay out millions to its shareholders.

“With many of the UK’s big dividend payers already pausing returns to shareholders and the insurers now joining their ranks, just how many dominoes are left to fall?”

These articles are for information purposes only and are not a personal recommendation or advice.