Should I Invest In Tesco?

LONDON -- To me, capital growth and dividend income are equally important. Together, they provide the total return from any share investment and, as you might expect, my aim is to invest in companies that can beat the total return delivered by the wider market.

To put that aim into perspective, the FTSE 100 has provided investors with a total return of around 3% per annum since January 2008.

Quality and value
If my investments are to outperform, I need to back companies that score well on several quality indicators, and buy at prices that offer decent value.

So, this series aims to identify appealing FTSE 100 investment opportunities, and today ,I'm looking at Tesco (LSE: TSCO  ) (NASDAQOTH: TSCDY  ) , the well-known supermarket chain.

With the shares at 366 pence, Tesco's market cap. is 29,520 million pounds.

This table summarises the firm's recent financial record:

Year to February 2009 2010 2011 2012 2013
Revenue (million pounds) 53,898 56,910 60,455 63,916 64,826
Net cash from operations (million pounds) 3,960 4,745 4,239 4,408 2,837
Adjusted earnings per share (pence) 29.06 31.8 36.44 40.31 35.97
Dividend per share (pence) 11.96 13.05 14.46 14.76 14.76

The recent full-year results don't look very pretty at Tesco. It's hard to see anything attractive in a 14.5% reduction in underlying profits.

During the year, the firm disposed of its assets in Japan, and it recently announced its intention to pull out of America. But there has been trouble closer to home, too, with weaker trading in Europe, and a catch-up investment programme for its U.K. stores, both pulling down profits.

Tesco now has some of the characteristics of a classic turnaround play. In that respect, the homeland is important, as the U.K. delivers around 65% of ongoing underlying trading profit. Investors will be hoping that the directors don't take their eyes off that spinning plate, again. Meanwhile, 19% of profit comes from Asia, 10% from Europe, and around 6% from Tesco Bank.

If the firm can get back on track, and the language of the directors sounds determined, investors could yet see out-performance on total returns, in the end.

Tesco's total-return potential
Let's examine five indicators to help judge the quality of the company's total-return potential:

  1. Dividend cover: adjusted earnings covered the recent dividend just under 2.5 times. 4/5
  2. Borrowings: net gearing is around 50% with net debt about 3.8 times operating profit. 3/5
  3. Growth: declining cash flow supports growing revenue and reduced earnings. 3/5
  4. Price to earnings: a forward 10.5 looks fair given growth and yield expectations. 3/5
  5. Outlook: disappointing recent trading and a 'determined to improve/optimistic' outlook. 3/5

Overall, I score Tesco 16 out of 25, which inclines me to take a neutral view on the firm's potential to outpace the wider market's total return, at least in the short term.

Foolish summary
A well-covered dividend, under-control debt, and strong cash-flow backing top the list of attractions here. The outlook is optimistic, and the valuation is neutral, and that would encourage me to buy Tesco shares for the long haul.

In fact, Tesco is one of "5 Shares to Retire On," a new Motley Fool report prepared by our top analysts highlighting five shares with seemingly impregnable, moat-like financial characteristics. They are shares that deserve consideration for any investor aiming to build wealth in the long run. For a limited period, the report is free. To download your copy now, click here.

link


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2408241, ~/Articles/ArticleHandler.aspx, 9/23/2014 8:29:32 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement