Tesco PLC‘s (LON:TSCO) decision to give back its £0.59bn business rates gift from the government provoked some incredulity in the City of London.

With the biggest risks of the pandemic behind it, the grocer’s chairman John Allan said directors were unanimous in believing the rates holiday payments should be repaid, saying the group is “financially strong enough to be able to return this to the public, and we are conscious of our responsibilities to society” and… “firmly believe now that this is the right thing to do”.

READ: Tesco repays £585mln of business rates relief as ‘right thing to do’

One of the first reactions was from online broker Interactiver Investor’s Richard Hunter, who said the decision was “somewhat surprising”.

There seemed to be more smoke coming out of the ears of broker Shore Capital’s head of research, Clive Black, in reaction to the news, as he said the U-turn by Tesco’s board was not only a surprise but also an “unjustified move in the big scheme of things”, “a hostile move for shareholders”, and a “dangerous precedent” with “undoubted read-across” to other supermarket groups such as J Sainsbury PLC (LON:SBRY) and Wm Morrisons Supermarkets PLC (LON:MRW).

He took issue with Allan’s “totally contradictory statement”, noting that Tesco stated why it was justified to take-up rate relief, with costs directly related to Covid exceeding relief at £725m, only to then to argue that it is the right thing to do.

“The reason given by Tesco to repay the rate relief seems to relate to the fact that the group believes it has been able to keep its stores open when others have not, not that the supermarkets had anything to do with that decision, that was determined by the UK governments, and so it is simply the right thing to do,” Black added, no doubt shaking his head in disbelief as he bashed out the note.

“In this respect, we absolutely do not believe that this is doing the right thing by all of its stakeholders, notably shareholders.”

The boardrooms of Tesco’s peer group are also likely to be cursing the move, said Russ Mould of AJ Bell said. “After all, if they follow suit, unlike Tesco they won’t be able to claim the brownie points for going first.

“Previously the grocers had argued they were entitled to take advantage of this tax break, despite being able to operate throughout the pandemic, due to all the extra costs they incurred and the pressures they faced in feeding the nation,” Mould added.

“Tesco will argue that today’s decision is less a reflection of a change of heart and more a story of a change of circumstances as the backdrop has stabilised.

“It may be that the company is seeking to pre-empt any action from a cash-strapped Government – which has seen supermarkets book big profits and in some cases increase dividends to shareholders despite the impact of Covid-19.”

Over at UBS, analyst Sreedhar Mahamkali seemed calmer and, while the accounting treatment of the repayment process is yet to be determined, if the company makes a decision to treat rates relief as exceptional, it is also likely to treat costs as exceptional.

“However, from a cash perspective, we would expect a negative impact of £535m in FY21 and £50m in the FY22 financial year, though clearly the latter has not been incurred yet.”

The UBS man said he does not believe that this rates decision impacts the Asia-related capital return plans but for the ongoing capital returns, “this does pose a question”.

While the £535mln impact this year is unexpected and sizeable, as the adjustment to gearing with all else being equal has an impact of 0.2x on gearing and is not of a structural long-term nature, Mahamkali said “the board may well look through this when it is judging TSCO’s ability to return excess cash to investors”.

Independent retail analyst Nick Bubb said the move is “admirable in many ways, although some will see it as bowing to media criticism of its dividend policy and it will put a lot of pressure on its less strong peers to follow suit”.

Similarly sanguine, analyst Michael Hewson at CMC Markets said: “Government money always tends to come with strings attached, and in light of some of the justifiable criticism levelled at Sainsbury last month over its decision to pay a special dividend, while cutting a number of positions, this decision means that any further payments to Tesco shareholders are likely to be much more difficult to criticise.”

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