FTSE 100 supermarket chain Tesco (LSE:TSCO) has had a sometimes rough ride over the past eight years. But just as it celebrated its fifth consecutive Christmas of growth, the pandemic hit. Can it give shareholders value for money and see its share price rise this year?
Tesco shares consolidate
Tesco has most of its focus in the UK. It recently completed the sale of some foreign assets for £8.2bn. It used this to pay a one-off contribution of £2.5bn to its pension scheme and it paid £5bn to shareholders as a special dividend. To coincide with the dividend, TSCO consolidated its shares to prevent the share price from plummeting.
The ex-dividend date is the day a stock trades minus the dividend value. It happens prior to a dividend being paid, and in this case it was 15 February. In usual circumstances, the share price will drop by the amount of the dividend when it enters the ex-div period. This means existing shareholders are getting their dividend, so they don’t need to worry. And new investors will not be getting the dividend, so they can buy in at a lower share price.
As £5bn was around 20% of the company’s market cap, it would have caused a considerable share price drop, which may have alarmed investors. That’s why Tesco chose to consolidate the shares. Unfortunately, the consolidation doesn’t appear to have made much difference as the share price is still down 26% from before it went ex-div and its market cap is £8bn lower.
So, what’s good about Tesco? Well, it has a potential advantage over competitors with its additional income stream from wholesale transactions. And it operates a convenience store format, plus retail banking and insurance services.
That said, this comes with substantial operational costs and competition is rising, its debt pile is also quite considerable. And the worry of inflation could send shoppers to its cheaper competitors.
With Amazon now offering grocery delivery, backed by Morrisons, and others, this brings further competition to supermarkets in the home delivery space. And Amazon’s delivery times are far superior. Ocado is another digital competitor gaining market share.
Nevertheless, it doesn’t yet look to be in danger of being pushed out. According to Statista, Tesco had the greatest market share of grocers in the UK monthly from January 2017 to December 2020.
Staying ahead of the game
Tesco is also ‘on trend’. It has an excellent selection of plant-based foods. It’s attempting to cut down on food waste and launching the UK’s biggest network of recycling points for soft plastic.
Clearly, when it comes to assessing Tesco’s future and value, there’s a lot to weigh up. There’s no doubt competition is fierce, but I think it has staying power. Its main competitive advantage is the big data it holds on consumers. Via its Clubcard, it knows consumer shopping habits inside out and can spot trends quickly.
It offers a 5% dividend yield. And with earnings per share (EPS) of 12p, it’s got a price-to-earnings ratio of 19. I think the TSCO share price is a little high and likely to continue fluctuating. However, analysts are predicting profits will rise, so that could be good news for patient investors. If I owned Tesco shares, I’d continue to hold, but there are other UK stocks I’d prefer to buy today.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Kirsteen owns shares of Amazon. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Morrisons, Ocado Group, and Tesco and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. 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.