When will Tesco (LSE: TSCO) get its act together and get back to earning growth?
That’s the key question for investors, and we’ll hopefully get some hints to the answer on Wednesday, 16 April when we’ll see results for the year just ended in February.
Weak markets
With the share price down 25% over the past 12 months, to 284p, investors are not looking optimistic. And that feeling won’t have been helped by Tesco’s Christmas and New Year update, which told us of “further weakness in the UK grocery market” leading to a fall in like-for-like UK sales.
Against that background, the company did take more than £1bn over the five days leading up to Christmas, and also achieved £450m in online sales in six weeks for a 14% rise. So the news wasn’t as bad as it could have been — but two years on from the crunch Christmas of 2011, investors really were expecting better.
Nice words
We heard more about “… ongoing work to Build a Better Tesco … driving continued improvements for customers” and all that, with chief executive Philip Clarke offering a caution that “the effects are being masked in the short term by the strategic changes we have made to improve the long-term sustainability of our business“. But there wasn’t a lot of concrete information, and we really need more than just slogans at this stage.
Tesco told us the full year should be in line with market expectations, which would suggest earnings per share of around 29p. That would be a fall of nearly 20% since a year previously, and follows on from an 11% drop for the year ended February 2013.
What about the numbers?
But, after having sounded so negative, I actually think this is a great time to be buying Tesco shares — because we really could be at a time of maximum pessimism.
Despite the fall in earnings, Tesco shares look set to provide a dividend yield of around 5% for the next three years, which is historically very high for the supermarket sector.
It’s true that dividend cover has fallen — before the price slump, Tesco shareholders were taking home around 3.5% and that was covered about 2.5 times by earnings. Now the cover is down to around 2 times, which is not ideal, but I really can’t see Tesco needing to cut its dividend before earnings start to grow again.
Looking cheap
And with the shares on a forward price to earnings (P/E) ratio of under 10 (with the FTSE’s long-term average around 14), the shares look like an oversold bargain to me.
So, don’t expect any surprises on the 16th — but do your sums and see if you might just agree with me.