ii view: Tesco still a share for both growth and income seekers

First-half results to 26 August

• Revenue up 5% to £34.14 billion
• Adjusted operating profit up 14% to £1.48 billion
• Interim dividend unchanged at 3.85p per share
• Ongoing £750 million share buyback programme
• Net debt down 1.6% to £9.88 billion

Guidance:

• Now expects full-year adjusted operating profit of between £2.6 billion and £2.7 billion, up from a previous £2.5 billion

Chief Executive Ken Murphy said:

“Our investments in value, and in improving more than 1,100 own brand products from pasta to fresh fish, are helping us to offer outstanding quality at great prices, all underpinned by market-leading availability.  Customers are responding well, contributing to market share gains in store and online.  

This relentless focus on customers, combined with significant cost reductions from our Save to Invest programme, has driven our strong performance in the first half of the year.  Food inflation fell across the half and while external pressures remain, we expect that it will continue to do so in the second half of the year.  We are in a strong position to keep investing for customers, and will continue to lower prices wherever we can.”

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ii round-up:

Starting out as a market stall in 1919, Tesco (LSE:TSCO) today employs over 330,000 people across its stores and distribution centres in both the UK, Ireland, and Central Europe. 

In 2017, it purchased UK food wholesaling business Booker, giving it exposure to both restaurants and other food convenience stores and businesses.

Headquartered in Welwyn Garden City, Hertfordshire, it also owns Tesco Bank.

For a round-up of these latest results announced on 4 October, please click here. 

ii view:

Tesco is the largest retailer listed on the UK stock market with a stock market value of over £19 billion. Rivals include Sainsbury (J) (LSE:SBRY) with a value at around £6 billion, B&M European Value Retail SA (LSE:BME) at £5.7 billion and Ocado Group (LSE:OCDO) at £4.8 billion. Group strategic focus includes being the most convenient retailer to shop with and reinvesting cost savings into the business to drive further growth.

For investors, the highly challenging economic backdrop for its customers including increases in mortgage and rental outgoings cannot be ignored. Elevated costs for businesses generally persist, intense competition across the sector including discounters Aldi and Lidi is ongoing, while currency fluctuations can affect parts of the business such as its Hungarian operation. 

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On the upside, Tesco’s UK market share remains solid at 27.2%, helped by gains during this latest period at its online business. It is diverse across geography and business type given its Booker wholesale and banking businesses. Cost savings continue to be reinvested back into competitive shelf prices, while shareholder returns remain a focus - resulting in £1.6 billion of share buybacks since late October 2021 and a forecast dividend yield of 4.1%. 

On balance, and despite risks, Tesco is a formidable business and has demonstrated it can fight with the discounters. An analyst consensus estimate of fair value at around 315p per share also looks to give grounds for continued longer-term optimism. 

Positives

• Robust UK market share
• Diversity of both business type and geographical region

Negatives

• Intense industry competition
• Uncertain economic outlook

The average rating of stock market analysts:

Buy