Tesco, is the market missing something?

It used to be the case that you couldn't go wrong investing in a safe, boring old company like Tesco.  It is a cash cow which until recently had around 30% of the supermarket pound in the UK.  Then in January Tesco delivered its first profit warning, the shares fell off a cliff losing around £5billion in value in a day.  However, it was a strange profit warning as it was mostly a reflection of a relatively small decline in its UK market, overall Tesco is still doing well if you include its impressive overseas growth.  Profits for the year were actually up.

Tesco Pre-tax Profits.

2008 - £2830 billion
2009 - £2917 billion
2010 - £3176 billion
2011 - £3641 billion
2012 - £3835 billion

What about dividend yield?


2008 - 2.7%
2009 - 3.6%
2010 - 3.1%
2011 - 3.6%
2012 - 4.6%

Share price performance?

6 months = -21.43%
1 year = -25.12%
3 year = -15.37%
5 year = -34.13%

So, if you look at the fundamentals, Tesco profits, dividend yield, revenue and Earnings Per Share are all up despite 4-5 years of austerity.  Just about the only thing going down is the share price.  The January profit warning was basically a city response to "not meeting expectations" which were set quite high for a company like Tesco.

The knock on effect of the decline in Tesco's share price was seen elsewhere in the sector.  Sainsbury announced its best Christmas trading ever, and has put up consistently good figures since the financial crisis started in 2007, yet in the last five years its share price has fallen from around 600p to 285p at the time of writing.

Tesco has announced today that it is to sell 50% of its Japan operations to Aeon, following on from an earlier announcement to cease operations in that country.  The other big problem area for Tesco overseas has been its US operations.  Profit expectations are behind the curve, but heading in the right direction.  Overall, Tesco performs well overseas and is a market leader in many of the countries in which it operates.

At a little over 300p, Tesco is on a P/E of around 8, with a dividend yield getting towards 5%.  The dividend looks reasonably safe despite the slight decline in UK figures.  However, a word of warning on Tesco and other retailers like Sainsbury.  The UK retailing sector is basically unloved by the market at the moment, sentiment is against it.  Long term monthly charts show that both Tesco and Sainsbury are currently in a downtrend.  Share price performance is unlikely to improve until that sentiment changes.

Figures from DigitalLook.