Investors in the Tesco (LSE:TSCO) share price are sizing up an early Christmas present with news that the UK’s largest supermarket chain is considering selling its Asian businesses.
So is now the best time to grab fistfuls of shares in anticipation of a healthy payout?
Tesco declined to say who had approached it about the potential sale of its Thai and Malaysian arms, saying only that it “commenced a review of the strategic options…following inbound interest“.
The sale could ring up as much as £7.2bn on Tesco’s tills with a special one-off dividend payment likely on the cards for existing shareholders.
Every little helps
The Tesco share price is up 22% in the last year but 2019 has not been all good news. Its leading market share is being eaten away by upstart rivals Aldi and Lidl and intense competition for shoppers’ attention is hurting its bottom line.
But the grocer signalled that 2020 could be a time for turnaround by telling the market it is giving serious thought to selling its South East Asian stores to the unnamed operator.
While Malaysia represents a small slice of the Tesco empire, almost 2,000 Lotus-branded stores have been opened in Thailand and management were drawing up plans for a further 750 before this unsolicited offer shook up their forward thinking.
The problem is this. These markets represent some of Tesco’s fastest-growing operations. Sales in the two countries produced 13% of the supermarket’s total profit in 2018.
Expansion into Asia has been a runaway success for what remains the UK’s largest private sector employer.
Four years ago Tesco shut the doors on its highly-profitable South Korean expansion, selling those Homeplus-branded stores for £4bn. That market was its largest outside of the UK at the time of the sale. Since 2013 it has also retreated from China, the US, and Japan.
Tesco has to make some drastic decisions since the 2014 accounting debacle that left an unprecedented £250m black hole in its books. There was no dividend paid in 2015 or 2016, and while final year dividends shot up 92% between 2017 and 2018 they are nowhere near Tesco’s pre-scandal days.
When Dave Lewis arrived on Tesco’s doorstep five years ago, the share price was 240p. Half a decade of cost-cutting and grinding effort, and shares are now worth almost exactly the same.
The last time I wrote about Tesco, I worried where the next big phase of innovation was coming from – the sort that would give investors hope that the shares could start climbing back towards 300p.
It’s likely that Tesco would use part of the sale money to raise its game in the UK by spending on profitable new prospects like checkout-free stores, as well as spending capital on closing the more unprofitable parts of its estate.
The biggest question remains whether Tesco represents a good income investment for 2020 and beyond.
On dividends of 2.4%, there are certainly better payers in the FTSE 100.
The price tag for Tesco shares right now – its trailing price-to-earnings ratio – is around 17. That is slated to fall to more like 13 when accounting for future earnings. But those earnings depend on Tesco keeping its most profitable operations alive.
While existing shareholders may be popping corks in time for Christmas, I would be wary of spending your hard-earned cash with the supermarket chain right now.
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Tom has no position in the shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.