Suffice to say, 2014 has been dismal for investors in Tesco (LSE: TSCO). Shares in the company have tumbled by a whopping 48% and its financial performance has not only been poor, but inaccuracies regarding forecasting have led to further weakened sentiment.
However, today there was some good news for Tesco investors. It is making changes to its board in the form of two new non-executive directors, with Compass CEO Richard Cousins and former IKEA CEO Mikael Ohlsson joining the company on 1 November. Here’s why their joining could prove to be great news and why shares could hit 260p over the medium term.
A Change In Culture
Over the weekend, it emerged that Tesco had received delivery of another private jet. New CEO Dave Lewis is apparently selling it immediately (along with the other private jets owned by Tesco) as he seeks to change the culture within the company.
Although this may at first appear to be something of a symbolic gesture, actions such as these speak volumes for where Tesco is headed. Indeed, as with any company, the culture at the very top of the organisation filters its way through to all members of staff. So, a focus on cost cutting and an attitude of ‘we’re all in this together’ by senior management could help to improve staff morale, which is likely to be very low at the present time.
New Faces
Indeed, new faces on the board could also help to drive through a change in culture. Not only do non-executive directors provide a check on the activities of senior management, they also help to set the strategy of the company. With Compass and IKEA being hugely successful businesses that operate in slightly different niches than Tesco, they bring with them a wealth of experience and knowledge that could transform the company’s culture, and ensure that its future strategy is sound.
Looking Ahead
Clearly, Tesco continues to be in damage-limitation mode. Hence the cutting of its dividend by around 60% this year. However, this may have been something of an overreaction on Tesco’s part, since it remains hugely profitable and, with the UK economy continuing to improve, shoppers’ focus on price could dissipate somewhat over the medium term.
As a result, a payout ratio of 35% (forecast for next year) seems rather low. Were Tesco to pay out 50% of profit (which would still be a prudent level and allow the company to conduct sufficient reinvestment), it would equate to dividends per share of 9.1p. With shares in the company currently yielding 3.5% (and assuming this yield remains), this could mean shares in Tesco trade at 260p.
Certainly, 260p may seem a long way off. However, with the company having been trading at that price level as recently as July this year, a new management team could help shares to reach that point rather more quickly than the market currently anticipates.
