Today I am looking at why I believe Tesco (LSE: TSCO) is a minefield for stock market investors.
Here are two numbers that I think help make the case.
35,000
The smash-and-grab march of the budget grocers has been nothing short of phenomenal in recent years. With shoppers wising up and realising that they can fill their baskets at Lidl and Aldi with much less pressure on their wallets, Tesco and the rest of the ‘Big Four’ have been left reeling as sales have fallen off a cliff.
And the discounters have ambitious plans to tighten their chokehold through expensive marketing campaigns, boosting their range of ‘luxury’ goods across the store, as well as a vast supermarket expansion programme.
Indeed, Aldi announced just this week plans to create 35,000 new jobs through to 2022 as part of its bid to build a portfolio of 1,000 outlets by then. The German firm currently operates 550 shops nationwide, and intends to create a further 60 to 65 in 2015 alone, up from the 55 newbuilds delivered in 2014.
Such rapid expansion bodes ill for Britain’s established chains, whose only tangible idea to take on the budgeteers is that of margin-sapping discounting. And even though Tesco and its traditional rivals are hiking investment in the electrifying growth areas of online and convenience shopping this is failing to stymie consistent sales declines.
Latest Kantar Worldpanel numbers showed till rolls at Aldi and Lidl rocket 27.3% and 18.1% respectively during the 12 weeks concluding October 12, while revenues at Tesco fell 3.6%. The Cheshunt firm has seen its market share decline to around 28.8%, levels not seen for around a decade, and worse could be in store as the cheaper chains get their expansion schemes off the ground.
5.23
Due to its ongoing travails at the tills, Tesco was finally forced to take the drastic step of slashing the interim dividend in August. Although such a move was widely expected in the light of enduring pressure on the balance sheet, the extent of the cut — a massive 75% reduction, to 1.16p per share — took many by surprise.
Not surprisingly, City analysts expect the full-year payout to nosedive in the year concluding February 2015 after three years of keeping the dividend frozen at 14.76p. Indeed, a 65% slump is currently pencilled in, to 5.23p per share. This in turn creates a yield of 2.8%, some way below the 3.4% FTSE 100 forward average.
And with Tesco having to do plenty of heavy lifting to mend its battered finances, from resuscitating its sales strategy through to asset divestments and even a possible rights issue, shareholders could see dividends remain under considerable strain for some time to come.