My quick takeaway on Tesco‘s (LSE: TSCO) recent profit warning is that it’s actually great news for Tesco!
Elsewhere in the sector, as far as Morrisons (LSE: MRW) is concerned, its shareholders should feel more optimistic about the future. Things are a bit more complicated with Sainsbury’s (LSE: SBRY), yet there’s nothing to worry about.
Tesco’s profit warning accelerates the process according to which the management teams of these three companies must take bold action, which is good for value in the ailing food retail sector.
Divvy Down?
The dividend policies of Tesco, Morrisons and Sainsbury’s have come under increased scrutiny in the wake of Tesco’s massive profit warning on Tuesday, the fourth in less than a year.
Investors focusing on the payout ratio in the food retail sector forget that there’s more at stake than falling stock prices. There are other priorities right now. To preserve competitiveness, I think Tesco, Morrisons and Sainsbury’s must be ruthless and implement a zero dividend policy for at least a couple of years.
Forget about investment in price cuts. Vital resources must be devoted to: a) their core infrastructure networks, which must be upgraded; b) online projects, including search engine optimisation; and c) more convenient, and efficient, delivery services.
Can supermarkets become asset-light businesses and deliver higher returns? Of course they can!
Who Needs Whom?
“S&P places BBB- under negative watch” was the subject of a broker’s email this week. So, it looks like Tesco is getting closer to “junk”. One notch down is non-investment grade territory, guys — which is generally associated to entities with weaker financials.
Tesco’s cost of funding may soon be on its way up. Too bad. But did anybody noticed that Tesco owns a rather big bank, whose boss, Benny Higgins, has been recently promoted to oversee the group’s strategy?
You’d want to be a fly on the wall to see the negotiations between the lender (Tesco Bank) and the borrower (Tesco). That’s not to say it’ll ever end up that way, though.
You should also know by now that Tesco, Morrisons and Sainsbury’s enjoy very strong relationships with banks and investors.
A Less Public Retail Sector
The banks and yield-starved investors need these three retailers more than these three retailers need their lenders right now. End of story.
Tesco, Morrisons and Sainsbury’s could easily raise funds even if they were private entities, rather than publicly listed companies. At a time when downwards pressure on their stock prices is likely to persist, Tesco, Morrisons and Sainsbury’s do not even need to be listed on the stock exchange. They probably don’t need a credit rating, either.
In this environment, these three companies should engineer a way to disappear from investors’ screens… could we see them being taken private in 2015? Only time will tell.
