Tesco downgraded by analysts despite surge in sales amid Covid-19

The UK supermarket chain saw a surge in sales due to panic buying amid the Covid-19 pandemic, but that didn’t stop analysts downgrading the stock on Wednesday.

Tesco saw its sales surge by almost a third due to panic buying amid the Covid-19 pandemic, but analysts still opted to downgrade the stock on Wednesday, with stockpiling being both a blessing and a curse.

Commenting on Tesco’s results, Russ Mould, investment director at AJ Bell, said that it will cost the supermarket to recruit and train new staff to handle the additional delivery capacity and overall demand during the crisis.

‘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,’ Mould added.

Analysts at Shore Capital opted to downgrade Tesco from a ‘buy’ to a ‘hold’ rating after the supermarket chain admitted that it could end up paying up to £925 million in higher recruitment and distribution costs. The investment bank also placed its ‘buy’ rating for Sainsbury's under review.

Tesco raises dividend despite increased Covid-19 costs

Despite the additional costs the company has had to endure due to the coronavirus outbreak, Tesco increased its final dividend from 4.10p to 6.5p per share.

The final dividend takes the total pay-out to shareholders for 2019 to 9.15p a share – representing an increase of 58.6%. However, the supermarket saw pre-tax profit fall by 18.7% to £1.32bn.

Looking ahead, the supermarket admitted that its Tesco Bank is likely to suffer from reduced income from credit cards, loans and travel money as a result of the pandemic, which could see the business record a loss in 2020.

But, even with all the headwinds Tesco faces, investors will take solace in the company maintaining its dividend, especially at a time when hundreds of UK stocks are scrapping pay-outs to preserve healthy balance sheets.

Tesco CEO says ‘feeding the nation’ comes at a cost

Covid-19 has put tremendous pressure on supply chains, with the UK food industry forced to step up during the crisis to ensure people have the supplies they need to stay home during lockdown.

Thankfully, initial panic buying has subsided and service levels are returning to normal across UK supermarkets.

But Tesco CEO Dave Lewis admitted that ‘there are significant extra costs in feeding the nation at the moment, but these are partially offset by the UK Business rates relief’.

‘Tesco is a business that rises to a challenge and this will be no different,’ he added.

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