Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) has been by far the UK’s biggest supermarket by market share for quite some years now — it regularly accounts for around 30% of the country’s groceries shopping, with Sainsbury’s and Asda managing a little more than half that.
But the giant has lost its way a little in recent times after a shaky Christmas a couple of years ago, and has since been working on a turnaround. Earnings dropped, though at least the dividend was held. But the share price has been struggling — despite a few hints at a comeback, it’s still down around 17% over two years while the FTSE 100 has picked up close to 20% in the same period.
Here’s a snapshot of the past five years’ figures, with City forecasts for the next two:
| Feb | Pre-tax | EPS | Growth | Dividend | Growth | Yield | Cover |
|---|---|---|---|---|---|---|---|
| 2009 | £2,917m | 29.1p | +6% | 11.96p | 3.6% | 2.4x | |
| 2010 | £3,176m | 31.8p | +9% | 13.05p | 9.1% | 3.1% | 2.4x |
| 2011 | £3,641m | 36.5p | +15% | 14.46p | 10.8% | 3.6% | 2.5x |
| 2012 | £4,038m | 40.3p | +11% | 14.76p | 2.1% | 4.6% | 2.7x |
| 2013 | £1,960m | 36.0p | -11% | 14.76p | 0% | 4.0% | 2.4x |
| 2014(f) | £2,507m | 31.0p | -6% | 14.80p | 0.3% | 4.4% | 2.1x |
| 2015(f) | £2,578m | 31.9p | +3% | 15.32p | 3.5% | 4.6% | 2.1x |
With the share price stuck around the 330p mark and on a forward P/E of just under 11, I couldn’t guess where it’s going to go next year — it’s below the FTSE average of around 14 as we’d expect, but not so far as to suggest a quick recovery is imminent.
Fundamentals
But as far as actual company performance goes, nobody is expecting any real upturn until 2015 — with a 6% fall in earnings per share forecast for the year to February 2014 followed by a mere 3% recovery predicted for a year later, that’s a losing spell by the standards expected of a market leader.
But there is one strong positive to be seen in these figures — even though Tesco’s dividend has been quite a bit better than average, it has been very well covered by earnings. That cover of more than two times has been better than Sainsbury’s, and on a par with Morrisons. Good cover like that is a strong defensive indicator, and it has allowed Tesco to maintain its dividend through the crisis with ease.
Slow recovery
What evidence do we have for Tesco’s recovery?
Well, profits were seen to be down at interim report time in October, but chief executive Philip Clarke did say that “Our performance in the UK has strengthened through the half, particularly in our food business…“, and told us that the firm’s store refresh programme is going well.
In addition, Tesco is apparently continuing to focus on multichannel shopping, with its online grocery business now also available in more than 50 cities in nine international markets. And its international success is what sets Tesco apart from its UK-rooted rivals.
By Q3 time, there had been more of the same — the recovery plan does appear to be working, if a little slower than some of us has hoped for.
Long term
With my negative vibes for next year, you might be surprise to hear that I have Tesco in the Fool’s Beginners’ Portfolio. Why is that? Well, that portfolio is very much targeted at the long term, and two of my key indicators are dividend and undervaluation. Tesco’s dividend is a dependable one, and with a long-term view I’m still convinced the shares are good value and will rise — and I’ll happily take 4.5% a year while I’m waiting.
But in the short term of the next 12 months, I see things still being tough for Tesco.
Verdict: Not out of the woods yet!