ii view: Tesco share slump inflates dividend yield

This supermarket giant is down 30% in 2022 and near a four-year low, but the forecast dividend yield is now 5%. We assess prospects. 

First-half results to 31 August

• Revenue up 6.7% to £32.5 billion
• Adjusted operating profit down 9.8% to £1.32 billion
• Interim dividend up 20.3% to 3.85p per share
• Net debt down 1.7% to £10 billion

Guidance:

• Expects full-year adjusted operating profit of between £2.4 billion and £2.5 billion, down from a previous £2.4 billion to £2.6 billion

Chief executive Ken Murphy said:

“By staying laser-focused on value and sticking to our strategy of inflating a little bit less and a little bit later, our price   position   has got even more competitive.  Customers are seeking out the quality and value of our own brand ranges as they work to make their money go further, whether they are switching from branded products, between categories or cutting back on eating out.

“As we look to the second half, cost inflation remains significant, and it is too early to predict how customers will adapt to ongoing changes in the market.  Despite these uncertainties, our priorities are clear.  We have the right long-term strategy and we will continue to balance the needs of all of our stakeholders.  Most importantly, we will stay focused on delivering value for our customers and supporting them in every way we can."

ii round-up:

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

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

For a round-up of the latest results published on 5 October, please click here. 

ii view:

Tesco is the largest retailer listed on the UK stock market with a value of over £15 billion. Primark owner Associated British Foods (LSE:ABF) comes in at over £10 billion, followed by Burberry Group (LSE:BRBY) at more than £7 billion. Both Ocado Group (LSE:OCDO) and Sainsbury (J) (LSE:SBRY) sit at under £4.5 billion. Its UK and Republic of Ireland retailing business generates the biggest slug of profit at around 90%, with the balance split evenly between its Central European stores across Hungary, Slovakia and the Czech Republic and its banking business. 

For investors, a narrowing of management’s full-year profit expectation towards the lower end of its previous estimate generates some caution. Inflation is pushing food prices higher, with Tesco now trying to strike a balance between higher prices for customers or reduced profit margin. A cost-of-living crisis now sees its customers seeking even greater value-for-money, while the latest Kantar supermarket survey indicates growing sales for discounters Aldi and Lidl. 

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More favourably, Tesco’s size and scale give it significant negotiating strength with suppliers, helping it battle rising costs. Its £1 billion cost saving programme is being delivered one year ahead of its original schedule, helping the company reinvest in price savings. City-beating like-for-like sales growth of 3.2% for this latest period may also be at the expense of previously acquired Morrisons and Asda, where sales have recently been falling according to the Kantar survey. 

In all, and given the combination of a market leading position, the reinvestment of cost savings in bolstering its value proposition, and an historic and estimated dividend yields of 5%, investors are likely to back Tesco over the longer term. 

Positives

• Continued share buyback programme
• Attractive dividend payment (not guaranteed)

Negatives

• Industry competition remains intense
• Uncertain economic outlook

The average rating of stock market analysts:

Buy