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J Sainsbury joins Tesco in risking reputation over dividend stance


Although this is meant to be dawn of the ESG, J Sainsbury PLC (LON:SBRY) today seemed to have no moral qualms in simultaneously dropping the axe on 3,500 staff, while taking a big handout from the government and with the other hand dishing out a chunky dividend to investors.

The market has since the dawn of time had the moral compass of a pirate, with the average company announcement of massive job cuts being rewarded with an immediate share price rise.

However, what with ESG and most of the population pretty miffed at being locked in their homes for most of the year, the FTSE 100 grocers have kindly applied some window dressing in their results this year to soften the blow.

Sainsbury’s, along with rivals Tesco and Morrisons, has been included in the government’s 12-month business rates holiday for retailers to cope with the coronavirus, even though almost all grocers have enjoyed stronger than usual trading.

The supermarket groups claim that their costs have risen as a result of the virus, though as this is mostly from hiring extra staff (and maybe a few thousand bottles of hand sanitiser) it doesn’t ring true.

For Sainsbury’s in the six months to September 19 its state bonus equated to £230mln.

It said this was more than offset by £290mln of costs from the pandemic.

It reported a loss before tax of £137mln but also generated seriously hefty free cash flow of £943mln, which enabled it to declare an interim dividend of 3.2p plus a special dividend of 7.3p.

Very neatly, the 10.5p dividend payment looks like it will be almost exactly equal to the £230mln government handout.

Losses going hand in hand with strong levels of cash flow has been quite fashionable for companies this year.

A lot of this is to do with depreciation and other non-cash accounting charges.

Sainsbury’s cash flow statement shows its £555mln underlying retail profit for the period, when £635mln adjustments for depreciation and amortisation were discounted, plus a £571mln decrease in working capital, plus a few small other items, taking away interest payments and pension contributions and tax, led to £1.42bn of net cash generated from operating activities – almost as much as it churned out in the whole of last year, which after capital expenditure and other outflows, ends up at £0.94bn.

Despite churning out all this cash, new boss Simon Roberts wants to stamp his mark on the company, although his predecessor, Mike Coupe, had overseen a pretty dramatic period of M&A – not all of its successful.

As such, Sainsbury joined many others in the retail and other industries in announcing various reforms, including further ramping its online and logistical capabilities, an extension to its convenience store format and acceleration of Coupe’s plan to overhaul the Argos store estate.

With a plan of eventually having an Argos presence in every Sainsbury’s supermarket, with just 100 standalone stores, this is where the 3,500 job cuts are coming from, along with the closure of fish, meat and deli counter services in Sainsbury’s supermarkets – although the company says it hopes to try and find jobs in its supermarkets for around 90% of these staff.

Although the redundancies have a strategic logic, it’s not the most generous timing to those thousands of people to then announce that the rest of the workforce will be getting a 10% bonus.

READ: Look past Tesco’s window dressing and its pandemic profits are clear

Sainsbury is not alone taking business rates relief while still paying a dividend, with Tesco paving the way last month, also pointing to extra costs incurred.

Investment analysts also mostly dismiss this as fine.

“We applaud the Sainsbury board for this decision as the group has looked after its customers, staff and supply chain through the pandemic as costs well exceeded business rate relief, and it is absolutely right for the group to look after its retail and pension fund shareholders in particular too through this pandemic and to think otherwise is both myopic and detached,” thunders Clive Black at Shore Capital.

Richard Hunter at Interactive Investor is less thunderous but also says that costs outweigh the business rates relief.

On Twitter there were numerous nuanced thoughts, as ever.

While the companies and the City seem fine with their decision, the pressure is likely to mount on the industry to repay this government money or else, as Susannah Streeter at Hargreaves Lansdown puts it, “they risk a reputational own goal”.

Louder voices have also recently called for the supermarkets to have a rethink.

Julian Richer, chief executive of non-food retailer Richer Sounds, this week said he was “really annoyed” that grocers had benefited from the rates holiday but enjoyed “queues round the block” at the same time that the pandemic completely paralysed non-food parts of the retail sector, while the CBI industry body urged corporations that had received taxpayer cash they did not need to “come together” and repay it.

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