Interactive Investor

ii view: supermarket king Tesco in confident mood

27th January 2023 15:17

by Keith Bowman from interactive investor

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Battling hard in the UK, Ireland, and Central Europe, but with a forecast dividend yield of over 4%. Buy, sell, or hold?

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Third-quarter trading update to 7 January

  • Like-for-like sales up 5.7%
  • Reiterated previous full-year profit estimate

Chief Executive Ken Murphy said:

“We go into the new calendar year with good momentum and I am confident we can continue to maintain our competitiveness and deliver a strong performance relative to the market despite the challenging conditions ahead."

ii round-up:

Starting out as a market stall in 1919, Tesco (LSE:TSCO) today employs over 340,000 people across its stores and distribution centres in both the UK, Ireland and Central Europe. 

Headquartered in Welwyn Garden City, Hertfordshire, it also owns wholesaling business Booker, along with Tesco Bank

For a round-up of this latest trading update on 12 January, please click here

ii view:

Tesco is the largest retailer listed on the UK stock market, with a value of over £18 billion. Both Sainsbury (J) (LSE:SBRY) and Ocado Group (LSE:OCDO) come in at under £6 billion. Its UK and Republic of Ireland retailing business generates the biggest slug of profit at around 85%, with the balance split relatively evenly between its Central European stores across Hungary, Slovakia and the Czech Republic and its banking business. 

For investors, a tough economic backdrop including mortgage interest rate rises for many homeowners whose fixed deals expire in 2023, cannot be forgotten. A failure to upgrade its full-year profit forecast in this latest update may have disappointed some, while business cost pressures persist and competition from the likes of Aldi and Lidl remains hot.  

To the upside, Tesco’s size and scale give it significant negotiating strength with suppliers, helping battle rising costs. Cost savings continue to be funnelled into competitive shelf prices, including a new price lock on 1,000 everyday products through to Easter, while its 2017 acquisition of wholesaler Booker gives it exposure to convenience retailing and catering outside the home such as restaurants.  

In all, and given a leading UK market share of 27.5% and forecast dividend yield of over 4%, this retailing mammoth looks to remain deserving of its place in diversified portfolios. 

Positives

  • Strong market share
  • Attractive dividend payment (not guaranteed)

Negatives

  • Intense industry competition
  • Uncertain economic outlook

The average rating of stock market analysts:

Cautious buy

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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