Before I answer that, I think it’s worth looking at Tesco’s announcement.
I thought the numbers were great, despite the challenges of the pandemic. Tesco generated £53.4bn in revenue compared to £49.9bn the previous year. The retailer’s sales were exceptionally strong. In fact, Tesco grew its UK market share during the year and it even gained customers from “all key competitors”.
But this came at the expense of profits taking a hit. Operating profit before exceptional items fell from £2.5bn to £1.8bn. Increased costs associated with Covid-19, such as taking on extra staff, impacted profitability. If the pandemic continues, these additional measures may hurt profitability going forward.
What I think makes Tesco shares attractive is that the company is improving its financial position. It reduced its net debt by £300m to £12bn during the year. This may not seem much, but it shows me that the food retailer is taking the right steps.
I’ve mentioned this previously, but it paid a £5bn special dividend to shareholders and plugged £2.5bn into its pension pot. This was from the sale proceeds of its Asia business. It’s also encouraging to see that it maintained its full-year dividend at 9.15p.
So not only is Tesco simplifying its business, it’s reassuring to know that the management team is shareholder-friendly.
Tesco has seen stellar growth in its online sales. In fact, it used the last year to improve its delivery capacity. The food retailer has doubled its weekly slots to 1.5m.
It also opened its first Urban Fulfilment Centre (UFC) in West Bromwich Extra with a second one in Lakeside Extra. A further four sites are due to open within the next 12 months. The UFCs will enable Tesco to provide access to more delivery slots for customers.
I’m pleased that it’s ramping up its online operations. I reckon that there will be a steady increase in online shopping and it’s here to stay. But it may dip from the pandemic peak once the coronavirus crisis is over.
It hasn’t been all good for the retailer. Tesco Bank has struggled and made a loss last year.
A decline in banking activity and an increase in provisions for bad debts did not help. The bank is expected to return to profitability in 2021/22. But I’m not convinced, especially when the the company itself says that this “is highly dependent on the economic outlook, which remains uncertain”.
Tesco Bank also faces competition from the larger players such as HSBC and fintech firms such as Monzo. This could hamper the division’s performance in the future.
Even Tesco’s overall outlook is somewhat subdued. I guess the management team has to be prudent given the uncertainty of the pandemic. It expects operating profits in the coming year to be similar to that of 2019/20. That was the year prior to Covid-19 having any impact on performance. Of course, there’s no guarantee this will happen.
Despite the cautious outlook, I’d buy Tesco shares at the current price. At the very least, it offers a generous dividend. To me, this indicates confidence in its future cash flows.
Nadia Yaqub has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and 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.