FTSE 100 stocks in focus: Tesco and Imperial Brands

Tobacco and food retail are sectors that are generally considered ‘defensive’. That’s to say, resilient when economic times are hard. It makes sense. After all, smoking is an addictive pastime and everyone has to eat. And yet, 2022 has so far been a year of contrasting fortunes for two FTSE 100 stocks in these sectors: tobacco group Imperial Brands (LSE: IMB) and top supermarket chain Tesco (LSE: TSCO).

Up and down

Imperial’s shares are up 21% year to date. Tesco’s are down 31%.
 
The theme continued on news from the two companies last week. A trading statement from Imperial produced a 2.5% rise on the day, while Tesco’s half-year results provoked a 4.1% fall.
 
Why the contrasting fortunes? And where will the stocks go from here?

Imperial in line

Imperial updated on its performance for its financial year ended 30 September. It said trading had been in line with its previous guidance. And that it expects to report full-year net revenue and adjusted operating profit growth of around 1% at constant currency.
 
Management also reiterated guidance for the next three years. It continues to expect low single-digit constant currency net revenue growth, with adjusted operating profit accelerating to deliver a mid-single digit compound annual growth rate over the period.

Improving returns

Imperial said it’s completed the two-year ‘strengthening’ phase of its five-year strategic plan, announced in January 2021. And is now moving into the next three-year ‘improving returns’ phase.
 
In addition to the existing “progressive dividend policy,” the company has started “an ongoing, multi-year share buyback programme” with immediate effect.
 
This means investors who stick with the company for the long term should not only receive a flow of rising dividends, but also an increasingly larger slice of the ownership of the business. All being well.

Deep in value territory

As I’m writing, Imperial’s shares are trading around the £20 mark, compared with a 52-week low of nearer £14. Buyers of the stock today are paying 7.6 times the earnings expected in the full-year results. The dividend yield is 7.1%.

Despite the strong rise in the share price this year, the earnings multiple and yield remain deep in traditional ‘value’ territory.

Tesco sets out its stall

Tesco reported a constant currency 3.5% rise in sales (excluding VAT and fuel) in its first-half results for the six months ended 27 August. However, adjusted operating profit was down 9.8%.
 
The company said the lower profit was due to the impact of reduced year-on-year volumes (as a result of a post-pandemic normalisation of trading), cost inflation and keeping the price of the weekly shop as affordable as possible for customers.
 
Tesco unwisely took its customers for granted during the hard times of 2008/09. I reckon the current strategy of doing its best for them — at the cost of lower profit margins — is the right way to go for the longer-term good of the company. 

Guidance

Despite the headwinds, management maintained its retail adjusted operating profit guidance for the full year within its previous range (£2.4bn-£2.6bn), although pulled it to the lower end: between £2.4bn and £2.5bn.
 
More positively, it upgraded its retail free cash flow guidance (previously £1.4bn-£1.8bn) to “at least £1.8bn.”
 
Nevertheless, the board also cautioned that “significant uncertainties in the external environment still exist, most notably how consumer behaviour continues to evolve.”

Valuation

Tesco’s share buyback programme, which started in October last year, hasn’t done a lot to support the share price. As I’m writing, the shares are trading near to £2, compared with a 52-week high of around £3.
 
On the plus side, this means Tesco’s been able to buy back a lot more shares at a lot lower prices as the year’s gone on.
 
Buyers of the stock today are paying 9.3 times the company’s trailing 12-month earnings. And the running dividend yield is 4.2%.

At the checkout

Tesco’s earnings multiple is higher than Imperial’s and its dividend yield is lower. However, the supermarket’s rating is by no means rich.

If you believe — as I do, and the company’s management does — that Tesco has “the right long-term strategy,” you may well be inclined to see value in the stock today.

Meanwhile, despite a strong share-price rise and perennial worries about the future of the tobacco industry, Imperial’s earnings multiple and dividend yield continue to look attractive to my eye.

I’m only sorry I didn’t buy the stock this time last year when our Motley Fool Share Advisor analysts identified it as their top pick for income and growth.