When evaluating the quality and durability of a business, it’s easy to focus too intensely on how a company is performing in the present year. I like to study how well a business has performed over a longer period of time, in a variety of different economic circumstances. Right now I’m digging through the records of the UK’s most popular shares, to unearth the businesses that have consistently created shareholder value.
Today, I’m looking at Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US), the FTSE 100 retail giant. All my figures are courtesy of S&P Capital IQ.
Despite the company’s recent woes, Tesco has been remarkably consistent in growing its sales over the years, by an average of 10% annually over the last decade. At £64bn, Tesco’s revenues have grown every year according to my records, which stretch back to the 1980s. It would’ve been hard to imagine a decade ago that a retail giant the size of Tesco would be able to almost triple its sales in 10 years, but that’s exactly what Tesco did the decade before that too, between 1993 and 2003.
Tesco’s operating margins have been broadly stable as well, at around 5.5% a year on average. As such, both Tesco’s reported profits and operating cash flows have improved almost every year, apart from most recently. Reflecting this consistent growth, Tesco has increased its dividend in all but one year since the 1990s, while usually achieving a consistent 15% Return on Equity. The overall picture is one of a business that has created shareholder value over time for patient investors.
Of course, the past record should never simply be used to make assumptions about the future, but I think we can glean some useful insights from Tesco’s track record. The company’s core offering hasn’t changed much over the years, and Tesco fulfils a persistent need among UK consumers, in good and bad years for the economy. Tesco has been able to use its retained earnings to pursue growth in UK market share, which seems to be relatively durable, and it will be interesting to see if the company can make a similar impression internationally over the next decade.
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> Mark does not own any shares in this article. The Motley Fool owns shares in Tesco.