For a long time, Tesco (LSE: TSCO) has been seen as a safe haven investment, remaining steady over the years. But since late August, the Tesco share price has slumped by more than 20%. And since the start of 2022, it’s down 28%.
Does that give us a rare opportunity to buy shares in one of Britain’s best companies at a knock-down price? With that question in mind, I’m looking at Tesco’s first-half results.
While announcing a new pay rise for UK workers, Tesco warned us that full-year earnings are going to come in at the lower end of its guidance range.
Though sales (excluding fuel and VAT) increased by 3.1%, adjusted operating profit fell 9.8%. And bottom line adjusted earnings per share declined by 4.9%.
Dividend rise
But offering a bit of a sweetener, Tesco lifted its interim dividend by 20% to 3.85p per share. That’s in line with a policy of paying 35% of the prior year’s total dividend at the halfway stage. So any necessary adjustment would presumably be made to the final dividend, and it’s probably wise for shareholders not to assume the same increase.
Still, if Tesco can maintain last year’s total payment, investors would see a dividend yield of 5.2% on the current share price. That alone makes me think Tesco is a likely long-term buy right now.
Perhaps the biggest threat to Tesco’s long-term dominance is the increasing competition from the cut-price cheapies, Aldi and Lidl. On that basis, I was looking out for any further increase in Tesco’s UK market share after last year’s gain. But while the company spoke of a “solid UK market share performance“, there are no further figures. Kantar puts it at 26.9%.
Outlook
Tesco maintained its full-year retail adjusted operating profit guidance of between £2.4bn and £2.5bn, though towards the lower end.
In troubled times, liquidity and cash flow can be key. And I see no problems there at all. The company has upgraded its retail free cash flow guidance to at least £1.8bn. Tesco will continue its share buyback programme too, completing the remaining £300m of its £750m programme “over the coming months“.
I think that bodes well for the final dividend, especially as net debt has fallen £472m since year-end.
Long-term buy?
I think this is a decent set of interim results. And judging by the Tesco share price barely moving in response, they’re pretty much in line with what the market expected.
Despite that, I reckon Tesco is probably facing a fairly lengthy period of tough competition and pressure on margins. And it can really only deal with that by keeping prices as low as possible to maintain market share.
As chief executive Ken Murphy said: “Customers are facing a tough time and watching every penny to make ends meet.” That’s surely not going to change any time soon.
While I can understand the 2022 Tesco share price fall, I do see it as a result of a shorter-term investing horizon. And it cements Tesco’s place on my list of long-term ‘buy’ candidates.
