The following article is very well done and the writer, who I know personally is one of the FT's best. The full article is on the FT web site at the link below. I have extracted key parts.
ORIGINAL ARTICLE ON FT SITE
So how is the company coping? Begin with its share of disposable income – described by the late management writer Peter Drucker as “the only measurement that matters, and businessmen have never heard of it”. This is most easily tracked in the UK, which still accounts for two-thirds of Tesco’s business. In the mid-1990s, when Tesco was beginning its growth spurt, its UK revenues were equal to some 2.3 per cent of household disposable income. By 2007 the figure had reached 4 per cent. Then, as recession hit, it rose further. Last year – which saw the biggest drop in real UK household income since 1977 – it hit a high of 4.3 per cent.
That is pretty much as we should expect. When times are tough, we may hold off buying clothes or electrical goods, but we keep buying food – which, for all Tesco’s diversification into those other areas, is still its main business.
While the dividend paid by a company should not affect its intrinsic value, the practical investment purpose of a utility is to provide an income. In this context, Tesco’s decision this month to raise its dividend by a mere 2 per cent was significant. Not only was this below the rise in earnings per share; it was the first time, as far back as I can track it, that the dividend went up by less than retail price inflation. But while this may be taken as a signal of intent, it does not seem to be due to lack of means. Free cash flow cover on the dividend has been steadily falling, from over 5 times a decade ago to 2.5 times now. But unless the company is in worse trouble than we know, that hardly puts the payment under threat.
Meanwhile, the historic yield on Tesco stock has risen to 4.7 per cent, compared with 3.5 per cent for the UK market overall. In such troubled times, that seems curious. Tesco may have lost its winning combination of growth and defensiveness, but its defensive qualities scarcely seem in doubt.
As to its ultimate prospects, I have no crystal ball. Equally, I take no view on whether the market is cheap or dear. But I think Tesco is cheap within it.
ORIGINAL ARTICLE ON FT SITE
When a previously rock-solid company disappoints, there is hell to pay. Ostensibly, the narrative attached to Tesco is a familiar one. A long-standing and well-regarded chief executive retires, and warning tremors follow. The inference seems plain: the old boss pushed his luck too far, and the business is now unmasked as run down, over-extended and so forth.
So how is the company coping? Begin with its share of disposable income – described by the late management writer Peter Drucker as “the only measurement that matters, and businessmen have never heard of it”. This is most easily tracked in the UK, which still accounts for two-thirds of Tesco’s business. In the mid-1990s, when Tesco was beginning its growth spurt, its UK revenues were equal to some 2.3 per cent of household disposable income. By 2007 the figure had reached 4 per cent. Then, as recession hit, it rose further. Last year – which saw the biggest drop in real UK household income since 1977 – it hit a high of 4.3 per cent.
That is pretty much as we should expect. When times are tough, we may hold off buying clothes or electrical goods, but we keep buying food – which, for all Tesco’s diversification into those other areas, is still its main business.
While the dividend paid by a company should not affect its intrinsic value, the practical investment purpose of a utility is to provide an income. In this context, Tesco’s decision this month to raise its dividend by a mere 2 per cent was significant. Not only was this below the rise in earnings per share; it was the first time, as far back as I can track it, that the dividend went up by less than retail price inflation. But while this may be taken as a signal of intent, it does not seem to be due to lack of means. Free cash flow cover on the dividend has been steadily falling, from over 5 times a decade ago to 2.5 times now. But unless the company is in worse trouble than we know, that hardly puts the payment under threat.
Meanwhile, the historic yield on Tesco stock has risen to 4.7 per cent, compared with 3.5 per cent for the UK market overall. In such troubled times, that seems curious. Tesco may have lost its winning combination of growth and defensiveness, but its defensive qualities scarcely seem in doubt.
As to its ultimate prospects, I have no crystal ball. Equally, I take no view on whether the market is cheap or dear. But I think Tesco is cheap within it.
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