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What could the Tesco dividend decision mean for its share price?

With the ongoing Covid-19 troubles far from over, investors are generally understanding of the situation companies are in. Cutting dividends, for example, is seen as a sensible move for the long-term health of a company.

I was surprised then, when earlier this month, supermarket giant Tesco (LSE: TSCO) said it intends to maintain its dividend despite concerns that coronavirus may hit its bottom line this year.

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Double-edged sword

This may be the right thing to do. It could encourage investors to keep holding the stock while bolstering the company’s position during difficult times. Tesco should easily afford the payout, and any lull in profits this year wouldn’t hurt its prospect in any serious way.

Of course, it may be the wrong thing to do. The payout could be an additional cost on top of financial troubles Tesco might see if the lockdown continues. The company could find itself in a situation later this year where it is forced to make cuts and report weak numbers. Its shares could suffer accordingly.

Personally, I think the first scenario is far more likely.

For one thing, compared to many industries, large supermarkets are well placed. Aside from the boost of panic-buying in recent weeks, stores have remained open as essential services, and its online shopping has grown as people aim to socially distance.

Admittedly the clothing retail arm of Tesco is likely to suffer – people do not buy new clothes in order to stay in the house – but its core business of groceries should be continuing as normal.

Much of my confidence in its decision also lies in the nature of this Tesco dividend itself.

The Tesco dividend

The proposed payout is just 6.5p per share, for a total of 9.15p per share for the 12 months to February – a current yield of about 3.8%. The payment is worth about £635m in total. It is reflective of the good performance of the company during the past year, rather than its upcoming concerns for this one. To put this in context, in March Tesco agreed to sell its South East Asia operations for $10.6bn.

CEO David Lewis has quite fairly said that as a public company, Tesco needs to consider the position of investors, many of them pension funds. This dividend is for profits already made, for example, and will not be paid for by any government subsidies — nor will it affect Tesco’s customers.

I also think it is a savvy move for the company. Keeping investors holding its share during these uncertain times, particular large institutional investors like those pension funds, will help support the share price. And this should keep Tesco in a strong position if worse times are ahead.

Investors are surprisingly faithful for the most part. We hold on to our favourite stock longer than we should. And we wear rose-tinted glasses when it comes to shares that have made us money in the past. This is particularly true when holding stocks for dividends, as consistent payouts are a prime consideration.

I think this Tesco dividend decision may not be enough to send its share price shooting higher. But it makes it of great interest as a potential income stock going forward.

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Karl has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.