The Tesco (LSE: TSCO) share price fell immediately after the company released its annual results on 14 April. The results were slightly lower than analysts’ median estimates.
The stock is currently trading at 232p. This is the same level it was trading at a year back. However, a special dividend and share consolidation have increased the value of the shares. I would like to once again review the company to see if it’s a good buy for my portfolio.
The bull case for Tesco’s shares
Tesco has good free cash flows. This year it had a retail cash inflow of £1.2bn. It was down 30% year-on-year mainly due to the negative impact of Covid-19. These costs are expected to be reduced in the future. The company was also able to reduce its pension liabilities by £2.5bn, from the proceeds of selling its Asian businesses. This has further strengthened its balance sheet.
The company continues to pay a decent dividend. Even if we exclude the special dividend, its current dividend yield is about 4.4%. The recent special dividend of 50.93p and the subsequent share consolidation have made the shares even more attractive. This is because the company reduced the number of shares, wherein 15 new shares were issued for every existing 19 shares. Since the drop in the number of shares was compensated for with the special dividend, investors won’t see any change in the total value of their shares. The total number of shares outstanding has decreased, which in turn has increased the earnings per share of the company.
The Covid-19 pandemic has tremendously increased online purchases. This would have taken many years to reach otherwise. Tesco was quick to adapt to this situation. It invested resources quickly so that it could make home deliveries. This is evident in its positive results. UK online sales grew by 77% year-over-year to £6.3bn. This now accounts for 16% of total UK sales, compared to 9% before the pandemic.
The company has also seen a very good response to its Clubcard membership. The preferential pricing for its members has made it a huge success. Also, the company’s Aldi price match has helped to improve its customers’ perception of its value.
The bear case for the Tesco share price
Most supermarkets have benefitted during the pandemic from the shift of consumer spending, due to the closure of pubs and restaurants. This situation will change very soon, once all sectors are fully open. As a result, Tesco may experience a drop in revenues.
The increasing competition in the supermarket sector is a also bit worrying. I’m troubled by this whenever I visit other stores like Asda, Lidl, and Aldi to buy certain items that are available at lower prices. Other large players like Morrisons and Sainsbury’s are also fighting for market share.
Final view
Tesco has continued to be a market leader in the UK supermarket industry. In spite of the competition, the company has adapted very well. The balance sheet is stable. I would consider buying the shares in the coming months.
