Interactive Investor

ii view: Tesco shares are generating interest

Covid has raised costs but a reset strategy and a dividend yield of over 3.5% offer strong positives.

13th October 2020 11:11

Keith Bowman from interactive investor

Covid has raised costs but a reset strategy and a dividend yield of over 3.5% offer strong positives.

First-half results to 29 August

  • Revenue up 0.7% to £28.7 billion
  • Pre-tax profit up 28.7% to £551 million
  • Net debt down 0.4% to £12.5 billion
  • Interim dividend up 20.8% to 3.2p per share

Guidance:

  • Covid-19 full-year (FY) cost estimate of £725million down from £840 million
  • Tesco Bank expected FY operating loss of between £175 and £200 million

Chief executive Ken Murphy said:

"The first half of this year has tested our business in ways we had never imagined, and our colleagues have risen brilliantly to every challenge, acting in the best interests of our customers and local communities throughout. We are absolutely committed to continuing to invest in value for customers and safety for all in these uncertain times.

"Tesco is a great business with many strategic advantages.  I'm excited by the range of opportunities we have to use those advantages to create further value for our customers and, in doing so, create value for all of our other stakeholders."

ii round-up:

Tesco (LSE:TSCO) employs over 400,000 people across stores and distribution centres in both the UK, Ireland and Central Europe. 

The Hertfordshire headquartered company generated revenue of over £60 billion and operating profit of more than £2.5 billion during 2019. 

In June 2020, it agreed the sale of its Polish business for £181 million, leaving it focused on the Czech Republic, Hungary and Slovakia in Central Europe. In March, it agreed the sale its Thailand and Malaysia business for £8.2 billion. 

It also owns wholesaling business Booker, along with Tesco Bank.

For a round-up of these latest results, please click here

ii view:

In recent years Tesco has undergone a major transformation. Its once vast product ranges have been pared down to aid buying power and competitiveness with the discounters Aldi and Lidl. At the same time it has upped pressure on both Sainsbury 's (LSE:SBRY) and Morrisons (LSE:MRW). A prior expansion overseas has now been reversed, with operations in China, Thailand, Malaysia, and Poland gone. Now, former Walgreens executive Ken Murphy has taken over as chief executive and hopes to build on the transformation undertaken by the previous Dave Lewis. 

As of this latest half-year, overseas operations excluding Ireland now account for less than 10% of overall sales, down from nearer 20% last year and before the sale of the Asia unit. Wholesaling business Booker generates around 13% of total revenue, while banking operation makes less than 2%.

For investors, full-year Covid-19 costs of over £700 million, although down on the previous estimate, did not figure in forecasts this time last year. Growing Republic of Ireland sales, while favourable, also need to be considered in the context of Brexit and the current uncertainty regarding any eventual trade deal. 

That said, a more focused Tesco in both product and geographical terms looks better placed to battle the threat of the discounters. A doubling of online delivery capacity is significant, both in contrast to the store-only discounters and given the cyber push which the pandemic has accelerated. A 20% increase in the dividend payment and an estimated forward yield of over 3.5% - excluding any special dividend - can also not be ignored in a world of Covid uncertainty and ongoing ultra-low interest rates. In all, with its strategy firmly reset, Tesco looks thoroughly deserving of its newly-found investor support. 

Positives

  • Defensive qualities 
  • Attractive dividend payment

Negatives

  • Tesco Bank hit by rising Covid-19 bad debt provisions
  • Industry competition is intense - both Aldi and Lidl continue to target new stores

The average rating of stock market analysts:

Strong 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.