Millions of customers shop in Tesco’s (LSE: TSCO) stores every week and it’s the market leader in the UK with a 29% market share. But if you’ve been a long-time shareholder, then given the extent of underperformance over the last few years, this information must make for scant consolation.
I’m sure you want at least your capital back (as bare minimum); to see the leadership make the requisite fixes (else the leadership itself needs fixing); and, following this, sustained earnings growth (with the share price rising).
Having patience is vital, and although Tesco shares are languishing, there’s still a 4.8% yield for comfort during the turnaround.
Is the turnaround on track? I’ll address three ongoing issues:
1) Philip Clarke’s position
After another disappointing set of quarterly results — UK like-for-like sales fell 3.8% — there have been no shortage of statements calling for Mr Clarke’s head. There was even, dare I mention, a comparison made with Nick Clegg.
It’s best to ignore any and all commentary of this nature. Clarke has insisted he won’t resign and nor should he feel compelled otherwise. He has said: “I’m not going anywhere. I am going to see through a fundamental reshaping of Tesco.”
What has been overlooked, amid the bluster, is that the sharp fall in sales is due to disruption caused by the ongoing store modernisation programme. Some 650 stores will be refreshed this year, and only once this process is completed can we draw meaningful conclusions from like-for-like sales numbers.
2) Pricing strategy
Tesco is investing £200m in price to compete with the German discount chains Aldi and Lidl. Sales volumes are up 28% on products where cuts have been made, such as carrots, cucumbers and milk.
Tesco has the size and scale to lead on price — with industry-leading margins — but does it need to be bolder here? The market isn’t so keen on a price war, and one of Tesco’s top 10 investors said it would be an “utterly pointless” endeavour.
3) Is the dividend safe?
After reporting its worst sales slump in 40 years, could the dividend — which has been held since 2012, having grew for 28 years prior — be under threat?
Analyst estimates have Tesco’s dividend being cut from 14.8p to 14p in 2015. Yet the dividend was covered 1.9 times by earnings last year, and unless something drastic happens (Philip Clarke steps down), then I expect the dividend will be maintained.
Investors should dedicate at least a small segment of their portfolio to leading blue-chip shares. These companies are highly sought after and, as such, are often are valued at a premium. Tesco, however, trades on a price-to-earnings ratio of 11, which is within value range.
