Throughout 2020 and the stock market crash, I saw Tesco (LSE: TSCO) as a safe and attractive long-term investment. But we’re now two thirds of the way through April, and the Tesco share price is down 20% since the start of the year.
And since the week before the 2020 crash kicked off, the shares are down a headline 28%. With the FTSE 100 having recovered to a mere 7% drop over the same timescale, could my judgement of what makes a safe investment benefit from a little refinement? First, what’s gone wrong?
It surely can’t be down to last week’s results. I mean, they weren’t great, but there was no real surprise. Headline operating profit fell 28%, with retail free cash flow down 30%. On a per-share basis, the bottom line showed a 36% drop in EPS. There was, at least, one bit of light — the dividend was maintained.
Not as bad as it looks
After a Tesco share price dip in February, the day of the results brought little change. So why have the shares done so badly in 2021? As my Motley Fool colleague Roland Head has explained, the headline fall is actually somewhat misleading.
Tesco returned £5bn in cash to shareholders in February through a special dividend. To counter the effect of that, there was a 15-for-19 share consolidation. As a result, the February share price dip was technical more than anything. Roland reckons that, allowing for these events, we’re really looking at an adjusted fall in the Tesco share price of only around 4% in 2021.
That seems a lot less worrying, but why would there be any weakness at all? The easing of lockdown rules is bringing one key change to our shopping habits. While we were holed up at home and unable to go out shopping as usual, Tesco’s online ordering was a boon. It helped hold back the onslaught of the cut-price cheapies, Aldi and Lidl. But as businesses open up, will their apparently inexorable march resume and continue cutting into Tesco’s market share?
Tesco share price future
It’s a realistic fear. And with a lot of people having suffered financially, the importance of finding the lowest prices could be greater than ever. But many shoppers who tried home shopping for the first time during the pandemic have found they really do like the convenience. And even though I expect growth to carry on at Lidl and Aldi, I just don’t see everyone abandoning Tesco now.
I also see Tesco becoming a lot more financially efficient these days, with a far keener focus on cash flow. And I think that should underpin the share price. The transformation has taken a few years. But in the 2020-21 year, when so many top companies almost folded, Tesco managed to reduced its debt. Year-end net debt stood at £12bn, down 2.8% from £12.3bn a year previously. For a company with annual turnover in excess of £50bn, I see no problem there.
There are risks, mostly through competition. But Tesco is a buy candidate for me now.
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Alan Oscroft 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.