Tesco (LSE: TSCO) is one of the UK’s top household names. The supermarket has operations across five European countries, including the UK and Ireland. In 2020, it employed over 423,000 employees at 7,000 stores. There’s a Tesco in almost every major UK location, making the grocer an ever-present part of British life. Furthermore, Tesco has been going for over a century, since Jack Cohen started out in 1919. Also, the UK’s largest supermarket — with a market share of 27% — is a long-term member of the FTSE 100 index. However, the Tesco share price seems to be down sharply since late January. But this isn’t bad news for its shareholders. Here’s why…
The Tesco share price’s big move
The Tesco share price appears to have plunged in 2021. On 27 January, the shares hit an intra-day high of 317.55p. On 15 February, the stock closed at 244.35p. TSCO closed even lower at 221.75p on Friday, valuing the business at just £17.2bn. That’s a fall of almost 96p — more than three-tenths (30.2%) — in five months.
Tesco paid out £5bn in cash
Something terrible happened for the Tesco share price to collapse so hard, right? Wrong, because it paid out a huge cash sum to shareholders in February, while reducing the number of shares. Hence, this perceived price fall hasn’t actually harmed TSCO owners.
The Tesco share price dived in mid-February because the group shook up its balance sheet to return cash to shareholders. On 15 February, the shares went ex-dividend for a special dividend of 50.93p per share. The special dividend was paid on 26 February to shareholders owning TSCO on 12 February. It totalled £5bn and represented some of the proceeds from selling Tesco’s operations in Malaysia and Thailand.
Also, the share base was reduced by using a ‘reverse stock split’. This replaced 19 ‘old’ shares with 15 ‘new’ shares. This made ‘new’ shares more valuable, because the number of shares in issue reduced by more than a fifth (21%). This explains the abrupt change in the Tesco share price. Today, as well as owning their shares, Tesco shareholders are also £5bn in cash richer.
Checking the Tesco share price before and after this event helps illustrate what really happened. On 12 February, it closed at 304.76p and then finished at 244.35p on 15 February. This 60.41p fall reflects the underlying effect of both corporate actions. Friday’s closing share price of 221.75p is 22.6p (9.2%) below the 15 February closing price, making the shares even cheaper to buy today.
Here’s how the shares have actually performed over eight timescales, taking the share consolidation into account:
| 1 week | -2.7% |
| 1 month | -4.3% |
| 3 months | -1.9% |
| 6 months | -2.1% |
| 1 year | -2.1% |
| 2 years | -5.8% |
| 3 years | -13.5% |
| 5 years | +45.3% |
As you can see, the Tesco share price has declined over periods ranging from one week to three years. However, the shares are up by more than four-ninths (45.3%) over five years. This shows the value of long-term investing for capital gains.
I’d buy TSCO today
For me, the attraction of Tesco shares is their dividend yield of 4.5%. That’s roughly one percentage point higher than the FTSE 100’s yield. However, it’s not been so easy for Tesco in 2021, as its latest quarterly results revealed on Friday. Sales growth is slowing and cash flow is likely to fall. Also, the chain remains under relentless attack from German discounters Aldi and Lidl. But while I don’t own TSCO today, I’d happily buy at the current price for passive income.
