Deep losses and stiff competition

The grocer announced a savings programme in September of £500m over the next five years. It includes closing some supermarkets and opening convenience stores. This programme did not go down well on the balance sheet of the company. The pre-tax profit saw a decline from £107m to £9m in the three months to September, due to a write-down of the property portfolio. There was a significant drop in profits, which is a red flag for investors. Like for like sales dipped 1% and revenue remained flat at £15.09bn. Total operating expenses increased and it has not led to a similar increase in revenues. The company cited high marketing costs, bad weather and reorganising costs as a reason for the decline.

Looking at the balance sheet, there are several bracketed numbers. The margin remains tight and revenues are not bringing in profits. Revenues of £16.9bn have only generated profits of £238m. Earnings per share has significantly declined from 0.19 last year to 0.13 this year.  It has consistently fallen over the last four years. The company has a current ratio below 1, which shows that debt repayment could be a big issue in the long run. A 3% increase in the divided does not justify the risk associated with an investment in the company, in my opinion.

The company faces stiff competition from Aldi, Tesco, and Lidl. Consumers are now increasingly choosing to make their purchases online, which reduces the need for brick-and-mortar stores. The performance of the company has not been very encouraging and forecasts for the coming year do not look attractive.

I’d buy this instead

If you are looking for a stock with consistent dividend payout and strong fundamentals, then Tesco is a good bet. Given the increasing competition in the market, while many grocers have lost share, Tesco has maintained its market share and continues to remain one of the top players in the industry. Tesco has a market share of 27% and the stock is considered a defensive investment. Even during a recession, people are not going to stop buying groceries and Tesco has more than 6,800 stores.

Its profit before tax increased by 6.7% and net debt was down by 7.8%. This  shows it is sustainable for Tesco to pay consistent dividends. I prefer the stock not only for the value for money but also because it offers security and low risk. The company expects an earnings growth between 5% to 10% in the coming period. Tesco paid 50% of the profits in the form of dividend and the company announced a divided 59% higher than the previous year. Tesco is likely to be bigger than what it already is today. The stock is fairly priced and has immense space to grow.

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Vandita does now own shares in any company mentioned. The Motley Fool UK has recommended 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.

1. Immense space to grow

Currently, Tesco seems fairly priced at 231.70p. However, I think the stock may look to grow. Tesco has grown at a rate of 20% compared to the 9% growth of FTSE 100 in 2019. The earnings growth is expected to range between 5% and 10% in the coming years while it is expected that the dividend growth will be higher. The price-to-earnings (P/E) ratio is 17.43. The industry P/E ratio is 19.87, and the company is very close to the industry benchmark. Since the P/E is lower than its industry average, there is scope for growth. With a market cap of £23 billion, the stock has a good basis to grow from. Tesco shares can offer a margin of safety, which I believe makes them appealing for investors.

2. Dividend payout

Income investors are concerned about the dividend paid by a company. During the last year, Tesco paid 50% of its profits in the form of dividends, which is a very healthy payout ratio. It paid 69% of its free cash flow, which shows the amount of cash the company owns. It is also a sign that the dividend is sustainable and the company should continue to pay for the coming years. The interim dividend issued by the company for the year is 2.65p and it is 59% higher than that of last year. 

3. Strong fundamentals

Tesco’s latest trading update showed fair numbers, with the company meeting the profit margin target between 3% to 4% ahead of schedule. The profit margins for the last year was 3.7% and for the last half-year was 4.4%. Earnings per share (EPS) has increased by 50% and dividends were up by 60%. Looking at the income statement of the company, the group operating profit has increased 25% and the EPS has increased by 49%. It has a strong retail free cash flow of £814m while the net debt has declined 7.8%. 

With the holiday season approaching, Tesco can expect high sales and revenue. The grocer has a strong market hold and the shares have done quite well so far this year. Tesco looks like a good bet to me at this point in time.

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Vandita does not own shares in any company mentioned. The Motley Fool UK has recommended 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.

The company’s products fall into a category that keeps sales ticking even in difficult times. Consumer goods including household staples never run out of demand and, on a typical day, a third of the world’s population will use a Unilever product. The manufacturer of Dove and Magnum ice cream has pledged to halve the use of plastic by 2025.  It owns more than 400 brands and uses 700,000 tonnes of plastic every year. It has pledged to cut the absolute usage by 100,000 tonnes by switching to reusable packs.

Benchmark-beating performance

The third-quarter sales increased by 2.9% and the turnover reached $14.7 billion as compared to $13.78 billion for the same period in the previous year. The beauty segment increased by 7%, home-care by 7.7% and food and refreshment by 3.5% during the quarter. The operating profit of the company has consistently grown since 2015. The earnings per share (EPS) growth was 62% in 2018 and the current EPS is 3.06. 

Emerging markets sales growth was 5.1% and the turnover increased by 5.8%. Unilever has a forward price-to-earnings (P/E) ratio of 21.27 and a 3.04% dividend yield. The company had a dividend yield of 6.19% in 2018.  The industry P/E ratio is 22.64, which shows that the company is better than most of its competitors in the industry. 

Established dividend payer

The company has ample net income to cover the dividend payout and has been consistently increasing the dividend over the last decade, keeping investors happy. The free cash flow yield for the company in 2018 stood at 1.30%. The  board declared a quarterly dividend of 35.76p, which is 6% ahead of the previous year. The company has consistently paid dividends since 2010. With constant earnings and revenue no matter the economic conditions, the company should be able to continue rewarding shareholders.

As the world gets more affluent, the demand for consumer goods should grow and it will eventually benefit Unilever. The stock is a good buy right now and one to hold forever. The company expects to continue underlying sales growth in the range of 3-5% and expects an improvement in the operating margin that will help generate adequate free cash flow for 2020. 

If you are looking for one stock that can beat a market crash and come out strong, Unilever it is. You will continue earning through the regular dividend payouts and see strong growth in the stock over the coming years.

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Vandita does not own shares in Unilever. The Motley Fool UK owns shares of and has recommended Unilever. 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.

Although Pearson became profitable within the last five years, its share price tells a different story. Other metrics will help better explain the move. Revenue of the company fell by 2.2% per year for the past five years. While the market gained 8.4% in the last year, the shareholders of Pearson lost 21%.

Revenue of Pearson stood at £4.13bn in 2018 as compared to £4.51bn in 2017. The net revenue has consistently declined over the past five years. Earnings per share was 75.60p in 2018 and the price-to-earnings ratio was 12.41. 

What about dividends?

Investors consider dividends as a source of income. The company has paid regular dividends for the past five years. Pearson offers a modest dividend yield of about 1.97%.  In 2018, the company paid £181.3 million in dividends and it had a negative cash flow for the year.

The educational publisher warned that the adjusted operating profit for the year will be at the lower end of its guidance range. Shares were down 16% after this announcement. Adjusted earnings per share are predicted to be at the bottom range of 57.5p to 63p. Revenue from US Higher Education Courseware, which contributes 25% to the total revenue, was down by 10% in the first nine months of 2019. It was mainly due to students returning to school turning away from print products sooner than anticipated.

Increasing competition

The biggest problem that Pearson is facing is a growing competition and the move of the industry towards online offerings. Back in the days of big capital investment in paper publishing houses and manufacturing of books, the large companies had an advantage with their financial clout and it helped maintain a defensive mat. However, the Internet is now helping smaller companies by lowering the barriers to entry. There are early signs of optimism in this case but they are turning out to be premature. The company is facing bouts of pain before anything works out and the share price valuation shows high optimism.

What does the future hold?

Pearson is optimistic about the future. It recently announced acquisition of Lumerit education. The deal is valued at $29 million and will address the needs of college degree completion and affordability in the consumer market. It is estimated that online education will significantly grow over the next ten years and this deal will give a strong market hold to Pearson. 

The company has bright plans and pays a dividend, but it does not justify the falling spree of the share price. The total shareholder return for the past five years is -28% and this gives a clear idea about the returns generated by the stock.  I do not think the valuation of Pearson offers enough margin to cover the risk.

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Vandita does not own shares in any company mentioned. The Motley Fool UK has recommended Pearson. 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.