U.K.-based Tesco PLC (TSCDY, Financial) (LSE:TSCO, Financial) recently reinstated its dividend. The retailer has gotten beaten up by discounters and its stock has performed poorly. The American depository receipt has been trading in a range for about three years and appears to be heading upward. Along with the dividend, management is trying to cut expenses and improve profitability.
The stock trades for 1.84 pounds ($2.40) in London, there are 8.19 billion shares and the market cap is 15 billion pounds ($19.95 billion). It takes $1.33 to buy one pound. According to the Financial Times, the dividend is 0.0088 pounds and the price-earnings (P/E) ratio is 21.5. Obviously not a useful metric to value the stock. An interim dividend of one pence was recently announced for half of the year. I am going to take that times two and put a dividend yield of 1%.
Until the interim reports today, gross margins were 5.4%, net margins 0.1% and operating margins 1.24%. Return on assets were 0.13%, return on equity 0.96% and return on investment 0.22%. These are pretty mediocre. Of course, a good year in profits would change all of that.
Sales were up 3.3% to 25.2 billion pounds for the interim. This is good news as Tesco had witnessed is sales shrink for many years and may have turned things around. Operating margins were 2.7%. Management has a goal to increase this to 3.5% to 4% in 2019 and 2020. Profits grew 27.3% from 596 million pounds to 759 million pounds. Cash generation grew 19.3% from 955 million pounds to 1.139 billion pounds. Net debt fell 25.1% to 3.3 billion pounds.
Sales fell from 63.41 billion pounds in fiscal 2013 to 55.93 billion pounds in fiscal 2017. Tesco and the other major British and European retailers got thumped by Lidl and Aldi’s. The discount retailers are tough to compete with. According to Kantal Worldpanel, the two increased sales 19.2% and 15.6% respectively. A recent article from Forbes was no too complementary and the author advised he will not be buying the stock.
The stock crashed and the ADR reached $8.30 almost exactly three years ago. It recovered to over $11 in February 2015. Over the past three years, the stock has been pretty flat. It seems the stock has been trading in this range for some time. The ADR has been doing pretty well lately and seems on the way up. The dividend news could propel the stock higher.
Of course, you are wondering how Tesco is going to compete with Amazon (AMZN, Financial). Tesco recently launched a same-day food delivery service.
Our firm owned stock in Tesco back in 2008-09, but sold when the financial markets crashed. We then purchased in the fall of 2014 as the stock was rebounding. I wrote about Tesco on Seeking Alpha after we sold the ADR at $10.81. We made a 17% profit. In the article, I wrote I did not want to hold onto a falling stock, facing strong headwinds. I was right—the stock would later touch $6.15. When we owned it nine years ago, I believe the stock was around $15.
I have followed Tesco for many years and always contended management should have maintained the dividend and atrophied—meaning selling off real estate and shrinking its retail presence. When you are the big dog in retailing in an area, especially an island like the United Kingdom, it is tough to compete with entrants like Lidl, Aldi’s and Amazon. To some degree, management has done this.
The stock might be a buy based on better news, less debt and the reinstated dividend. According to the chart above, the stock price seems to be moving up. If the dividend was greatly increased, watch out. That could be the catalyst for the stock--annual increases in the dividend.
Disclosure: We do not own shares.
