ii view: will Tesco boost returns to shareholders?

A strong Christmas with full-year profit guidance raised. We assess prospects for this retailing giant. 

Trading update for the 19 weeks to 8 January

• Total group sales up 2.6%

Guidance:

• Expects retail operating profit slightly above the top-end of prior forecast range of £2.5 billion to £2.6 billion
• Expects bank operating profit to be between £160 million and £200 million

Chief executive Ken Murphy said:

"We are delighted that we were able to help our customers have a great Christmas.  Despite growing cost pressures and supply chain challenges in the industry, we continued to invest to protect availability, doubled down on our commitment to deliver great value and offered our strongest ever festive range.  This put us in a strong position to meet customers' needs as, once again, Covid-19 led to a greater focus on celebrating at home.  As a result, we outperformed the market, growing market share and strengthening our value position.”

ii round-up:

Tesco (LSE:TSCO) employs over 350,000 people across stores and distribution centres in both the UK, Ireland and Central Europe. 

The Hertfordshire headquartered company generated revenue of over £57 billion and operating profit of more than £1.7 billion in its last full financial year to the end of February 2021. 

It also owns wholesaling business Booker, along with Tesco Bank.

For a round-up of this latest trading update, please click here. 

ii view:

Tesco is the largest retailer listed on the UK stock market with a market value of over £21 billion. That easily overshadows Ocado (LSE:OCDO) at £10.5 billion and JD Sports Fashion (LSE:JD.) at just over £10 billion. Former Walgreens executive Ken Murphy is today building on a reset strategy. Refreshed plans to direct cash or capital across the company now include a commitment to growing the dividend, maintaining an investment grade balance sheet, investing in the business and returning any surplus cash to shareholders. In 2021 the grocer launched a £500 million share buyback programme as a further avenue to return cash to shareholders. 

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For investors, competition across the sector remains intense. Discount retailers continue to open new stores and changes of ownership at rivals ASDA and Morrisons could now see increased efficiencies reinvested in product prices. UK inflation at a 30-year high is likely to generate wage pressures across the economy, while global supply chain challenges and driver shortages persist. 

More favourably, lower prices should reduce the threat of consumers trading down. A major cost saving programme is underway, its long established Clubcard offers significant customer insight, and the performance of its banking unit is on the up. The reopening of the hospitality sector should also be positive for wholesaler Booker and additional Covid cost may now be unwinding. In all, and with Tesco taking the fight to the discounters, and significant cashflows funding both potentially further share buybacks and an estimated future dividend yield of over 3.5%, this retailer continues to deserve its place in investor portfolios. 

Positives

• Growing market share in both stores and online
• Attractive dividend payment (not guaranteed)

Negatives

• Industry competition remains intense
• Uncertain economic outlook

The average rating of stock market analysts:

Strong buy