Tesco (LSE:TSCO) has had an excellent year and its share price reflects that.
On Christmas eve 2018, the Tesco share price opened around £1.91. A year later and it is trading around £2.53. This is an increase of more than 31% for those who bought and held their shares over this time. During this period, the FTSE 100 has gained 13%, which is also a good return for those FTSE 100 investors with a tracker fund celebrating the rise in the index to its current level of approximately 7,580 points.
Why is Tesco prospering? Keeping up with the times, it has been adding to its Wicked Kitchen range, which focuses on plant-based meals for buyers increasingly concerned about the planet and personal health.
Tesco now boasts one of the best and largest ranges of plant-based choices available on the UK high street. In September it launched a second vegan range called Plant Chef made of soya-based products. To complement this vegan message, it then added a range of environmentally friendly vegan make-up brushes and released an advert with a little girl telling her Dad she no longer wants to eat animals. It has also expanded its range of groceries and cooking kits to assist consumers in making plant-based dishes at home.
Tesco’s Clubcard has 19 million members, which gives Tesco a major power grab in consumer data and personal shopping habits. It is using this to influence shoppers and encouraging them to eat more healthily.
At the beginning of December Tesco announced it’s considering exiting its low-profit-margin Asian businesses in Malaysia and Thailand after receiving potential buyout bids. A review is under way, but a deal could be worth as much as £9bn. It’s already divested its unit in Korea and exiting Asia would give it greater focus on its core UK business.
Nightmare before Christmas
Not all is rosy though. At the weekend, the firm had to face the nightmare accusation that it has unwittingly stocked charity Christmas cards allegedly made by prisoners in China under duress. This kind of publicity is the last thing listed companies want to deal with and highlights the risks of using Chinese suppliers that may not adhere to British human rights laws and standards. Tesco immediately withdrew the card ranges, launched an investigation and delisted the supplier. The revelation had no effect on Tesco’s share price.
Back with the plus points, Tesco acquired UK wholesale supplier Booker in 2018 and this has been a strong move. Booker has high profit margins, which has aided the FTSE 100 supermarket in attaining its profit margin goal.
Tesco’s dividend, which was reinstated in 2018, after a three-year recovery break, is 2.2%, covered more than twice. Its price-to-earnings ratio (P/E) is 18 and earnings per share are close to 14p. Tesco shares are not particularly cheap, but Brexit and global worries have reduced the P/E of companies deemed risky in these volatile times, while pushing up the P/E of those more inclined to survive the turmoil.
The 2019 turnaround in fortunes is largely credited to ‘Drastic Dave’ Lewis, who will depart for pastures new in 2020. Some investors have concerns at him leaving the helm, but I think the groundwork he’s laid is solid and can continue to be built upon.
I like how Tesco has cornered the plant-based market with veganism going mainstream and I consider Tesco shares a Buy.
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Kirsteen has no position in any of 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.