Tesco special dividend: what is it and should I buy the shares now?

Followers of the Tesco (LSE:TSCO) share price have been regularly disappointed over the years. The company has been unable to secure any sustainable growth for its shares in the long term

If I had bought Tesco shares a year ago, they would be worth around 10% less than I paid for them. Even over the last week, the company has lost more than 5% of its value. This comes despite the fact that the grocery sector has seen its sales surging 12% in recent weeks as lockdown restrictions bite.

In response to its struggles, the FTSE 100 company announced the introduction of a special dividend of £5bn that it was to return to investors.

But what is this Tesco special dividend and is it enough to see the share price through to a recovery?

What is the Tesco special dividend?

As part of the proceeds of the supermarket group’s sale of its Thai and Malaysian operations, in January Tesco announced the £5bn payout to shareholders. The move came as part of a larger consolidation of shares, in which the total number of shares issued was reduced to reflect the return of capital on the balance sheet.

It also announced it was committing a further £2.5bn to its benefit pension scheme, contributing further to reducing overall liabilities.

While I agree that the asset sale and share consolidation should help with Tesco’s balance sheet issues, there are a number of factors that I think are weighing on the shares.

First of all, one of the reasons Tesco’s growth has been stunted recently is increased competition from budget supermarkets such as Lidl and Aldi. These competitors are seeing their level of market share creep up every year.

At the other end of the scale, increased online grocery purchases have boosted profits at Ocado, with Tesco not as well prepared for the move towards this mode of shopping during the pandemic. However, it has been boosting it online ops.

Tesco could also be one of the companies in the firing line for a one-off tax hinted at by the government earlier this year. The levy is aimed at those companies that have made ‘excessive’ profits as a result of Covid-19.

Market share lead

Despite the increased competition in the supermarket industry, Tesco still maintains a healthy lead in terms of market share in 2021. While it has dipped slightly over the last three years, its share of the market still stands at 27%, according to Statista. The closest challengers to this are Sainsbury’s and Asda, both of which come in around 15%.

To me, Tesco still very much feels like a defensive stock. While there have been operational issues as a result of the pandemic, for the most part demand for its products remains strong, as people will always need to eat and drink. 

In its most recent earnings report Tesco said UK sales rose across all formats, channels and categories and that it led the market for every week of the Christmas period. 

While its share price did not match that growth, I believe the share restructure could be enough to send the Tesco share price higher in the long-term and would consider adding it to my portfolio.