It’s over three years since incoming chief executive Philip Clarke expressed himself as unhappy with the Tesco (LSE: TSCO) core UK business. He said: “We can do better and we are taking action”.
Despite Clarke putting in place a new “dedicated, experienced” UK management team, a shock profit warning 10 months later exposed just how deep Tesco’s problems ran. The shares slumped. Suddenly, Britain’s number one supermarket — an unstoppable juggernaut for as long as most investors could remember — had become a turnaround situation.
Going backwards
There’s scant evidence yet of recovery gaining traction. Indeed, it’s looking an ever longer haul, as competition in the sector has intensified, and problems in Tesco’s international markets have added to management’s woes.
No longer can the company be said to have about a third of the UK grocery market; it’s now nearer a quarter. Earnings have tumbled too — 14% and 7% over the last two years — and the dividend hasn’t budged.
The worst is yet to come
Tesco has just updated broker consensus forecasts on its corporate website, and they make for grim reading.
The table below shows analysts’ estimates for the year ending February 2015, as they stood at March (ahead of the 2013/14 results, announced last month), and how they stand today.
| Year ending February 2015 | Consensus forecasts at March | Consensus forecasts at May |
|---|---|---|
| Revenue (ex VAT, inc petrol £bn) | 64.50 | 63.38 |
| Underlying Profit before Tax (£bn) | 2.87 | 2.73 |
| Underlying diluted EPS (p) | 28.45 | 26.30 |
| Dividend per share (p) | 14.51 | 14.15 |
Earnings per share (EPS) have been revised down 8% from March, and 26.30p would represent an 18% dive from Tesco’s 2013/14 EPS of 32.05p.
250p and a dividend cut?
But could Tesco’s shares, currently trading at 305p, fall below their recent multi-year low of 281p and hit 250p?
Well, in the aftermath of the profit warning of 2012, the shares traded at just over 9 times forecast EPS. If they were rated on the same multiple today, they would be trading at … yep, you’ve guessed it, 250p. So, it’s certainly possible.
A dividend cut may be less likely. The consensus dividend forecast of 14.15p is just 4% below the 14.76p Tesco has paid out for the last three years, while even the most bearish analyst’s forecast, which is 11.56p, represents a fairly modest 12% reduction. Companies rarely go in for such minimal trims, and I think Tesco will maintain the payout at the current level if at all possible.
Perhaps, the biggest risk to the dividend would be if Clarke stepped down under a further deterioration of trading, and a new chief executive came in and did the classic kitchen-sinking, including a ‘rebasing’ of the dividend.