Friday, 29 August 2014

Tesco publishes "Trading Statement" and Dividend Cut

UK supermarket giant Tesco has delivered a trading update to the market this morning. For shareholders (such as me) it reads rather badly for the short term. But maybe the longer term still looks a little less disappointing.

Dividend in decline? 

Perhaps most immediately obvious is the declaration regarding the dividend. They state that the "Board anticipates that it will set the interim dividend at 1.16p per share - a reduction of 75% from last year's interim dividend." It is a pretty dramatic slash of the interim dividend. It was 4.63p per share last year.

Assuming that the same 75% drop would occur to final dividend next year as well (which seems likely) we would expect to see a dividend at about 2.5p. What does this mean for the yield? Quite dramatic changes, as it happens.

Assuming a 3.66p dividend for the year in total at the current price of 236p we would see a yield of 1.5%. Sadly, my own holding will see an even more dire yield on cost drop. My holding cost on average 329.17p per share. Consequently, my yield would then sit (assuming the equivalent drop in the final dividend) to 1.1%.

This is a very dramatic cut.

I did expect a cut to come on purchasing the stock, it must be said. It had been treading water at the same value since 2011 and as profit growth was not forthcoming, the dividend was always in danger. However, a prospective 75% cut across the year was not quite what I expected. Something in the region of 50% was more what I anticipated.

Still a high-quality business?

In reality, had I not purchased Tesco shares early on in my investing life I would probably not have bought them at all until all this readjustment had come about. It does not quite tick all the boxes I am looking for currently despite still retaining significant value.

Tesco is still an excellent company. However, it is in a period of transition as it works out how to compete or outmanoeuvre its competition in a highly competitive sector.

Am I still happy I have a little holding in Tesco as a business? Yes. It is still a high quality business even though we are currently at a point where it is stepping sideways rather than forward.

The cut did not come from nothing. The trading statement also offered investors another warning: this time a profit warning. They state that:

The business continues to face a number of uncertainties, including market conditions and the pace at which benefits from the investments we are making flow through in the second half and consequently the Board has revised its outlook for the full year. We now expect trading profit for 2014/15 to be in the range of £2.4bn to £2.5bn. Trading profit for the six months ending 23 August 2014 is expected to be in the region of £1.1bn.

Not great, certainly. But it is still a profit even if a declining one. The company still has ample room to manoeuvre. Now we just have to wait to see if they are flexible enough to take advantage of that reality.

Some better news?

On better news, the new CEO, Dave Lewis, will be with us quicker than expected. He will be joining Tesco from 1 September. He has a reputation for being able to turn around lacklustre performance which will hopefully be replicated at Tesco.

Certainly this kind of bold move with regard the dividend is encouraging. rather than trying to just hold the fort as Philip Clarke attempted Lewis seems happier to sally forth in a more aggressive manner. Hopefully it will be successful.

On other better news, we hear that capital expenditure is being curtailed:

In addition, we are implementing further reductions in capital expenditure. For the current financial year capital expenditure will now be no more than £2.1bn, some £0.4bn less than originally planned and a reduction of £0.6bn from the previous financial year. This will be achieved in a number of areas including IT and the slower roll-out of our store refresh programme.
This is all pretty encouraging. However, I do hope the "slower roll-out of our store refresh" is not too slow. Some of the superstores in my experience do need to be updated. Many consider that they are competing with the discounters such as Aldi and Lidl. I don't think this is really the case.

Tesco is slightly "higher"-end than either of those. However, sometimes the stores do not give that impression. The store refresh programme was helping to make this distinction clearer.

Anyway, currently I keep Tesco as a Hold in my portfolio.

What do you think?

What are you doing with your Tesco shares? Are you selling them? Do you plan to jump on board again once the price drops down? Do you think Tesco is still a quality business?

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