How to trade Tesco shares
Thinking of trading Tesco shares? We go through the basics of Tesco and explain how to analyse the company.
How to trade Tesco shares
There are other ways to speculate on the future price movement of Tesco shares. This allows you to go long or short on the stock, allowing you to capitalise on opportunities no matter what direction shares are headed.
This is done through CFDs. This form of trading also allows you to take advantage of leverage, which means you don’t have to put down the full value of the trade upfront and you can get much larger exposure. However, your profit or loss will be based on the full size of your position. When you trade shares you don’t own the share outright or benefit from dividends.
Understanding Tesco: a brief history
Tesco was setup as a grocery stall in the East End of London in 1919 before opening its first store a decade later. After rapidly expanding inside and around the capital, Tesco went public in 1947, with shares listing for 25p.
There were over 500 Tesco stores by the end of the 1950s as the company bought up several small grocers, and the firm was the first to introduce the ‘superstore’ format to the country when it opened a 40,000 square foot outlet in West Sussex in 1968. It started to bolt petrol stations onto its stores in the early 1970s.
By the 1990s Tesco started to diversify and experiment with new formats. It started to open smaller stores under the Tesco Metro fascia before later adding Tesco Express and Tesco Extra, with the latter offering new homeware and electrical goods as the company moved beyond selling food.
It also expanded beyond the UK in 1995 by entering Hungary and, within a decade, Tesco had pushed further into Central Europe with stores opened in the Czech Republic, Slovakia, Poland, Thailand, Malaysia and India. 1995 was also the year that Tesco first overtook its rival Sainsbury’s in terms of UK market share, partly thanks to the launch of its Tesco Clubcard loyalty programme that attracted 5 million new customers in its first year.
Tesco went digital at the turn of the millennium by launching its online site, which today serves over 20 million customers every month, and a year later it introduced its Florence & Fred (F&F) clothing range. It also expanded its network of convenience stores by buying One Stop.
More recently, Tesco diversified from retail into wholesale by purchasing Booker Group, which supplies food and drink to convenience stores, restaurants and other businesses. It has also responded to the threat of discount chains like Aldi and Lidl by launching a new, no-frills brand named Jack’s, after its founder Jack Cohen.
Tesco: an international business
Tesco in the UK & Ireland
Tesco is the largest supermarket chain in the UK in terms of market share. It has over 3400 stores, including all of its hypermarkets, superstores, supermarkets and convenience outlets.
Tesco Bank was launched in 2008 and now has around 7 million customer accounts on its books. This offers financial services to its UK grocery customers, primarily mortgages, credit cards, loans and savings to Clubcard holders.
Booker Group is the UK’s leading food wholesaler that merged with Tesco in March 2018. The company has over 1.2 million customers in the UK and India and significantly diversifies Tesco’s operations and adds vital scale. The Booker Group comprises Booker Wholesale, Makro, Booker Direct, Classic Drinks, Ritter Courivaud, Chef Direct, Premier, Family Shopper, Budgens, Londis and Booker India.
Tesco in Central Europe
Tesco broke into the region by acquiring a string of stores in Hungary in 1995, where it now has over 200 stores and is one of the largest employers in the country. It expanded into the Czech Republic a year later and the country has become a vital component of its European operations, and one of the few where Tesco has launched online grocery services and standalone F&F stores. However, Poland is the company’s biggest market in the region, with over 400 stores serving over 5 million customers each week. It also has over 150 stores in Slovakia, where it also offers financial services, mobile services and F&F clothing.
Tesco in Asia
Tesco has moved into some of the most lucrative Asian markets. Vital global operations, including much of its supply chain, is managed from India, where it also wholesales to local stores. It also had over 50 hypermarkets in Malaysia and over 2000 stores in Thailand, with both countries also offering online services. It has also been present in China since 2014 under a joint venture with China Resources Enterprise. Tesco sources 50% of its clothing and 40% of other non-food items from China to serve across its international operations each year.
Tesco financial performance and future earnings consensus
Tesco has been implementing a turnaround plan for the last four years, which it hopes to complete in the new financial year to 23 February 2020. This has involved making substantial cost-savings, improving the competitiveness of its product ranges and prices, and making profit more sustainable.
Tesco has continued to be the strongest performer among the Big Four supermarkets, even if discounters Aldi and Lidl still pose a threat. It was by far the strongest performer over the crucial Christmas period in 2018, helping to deliver an 11% rise in annual revenue and a 28% jump in pre-tax profit in the recently ended financial year.
Revenue has consistently grown during the turnaround programme and profit has seen a significant step up.
Analysts expect Tesco to continue building on the momentum in the coming years with forecasts that revenue will rise 1.6% in the current financial year with efficiency improvements expected to drive a 12% jump in pre-tax profit. Although that would represent a significant slowdown from what was delivered in the recently ended financial year, investors will welcome any form of growth at a time when the large supermarkets are struggling to stave off competition and battle tighter margins.
|Underlying operating profit||0.99||1.28||1.64||2.21||2.48||2.65||2.74|
|Underlying diluted EPS (p)||5.79||7.30||11.88||15.40||17.88||19.83||21.04|
(Source: Tesco company reports, Tesco-compiled analyst consensus as of 12 June 2019)
Tesco key personnel: who manages the supermarket?
Non-executive chairman John Allan joined in March 2015. He was the chief executive officer (CEO) of Exel when it was bought out by Deutsche Post in 2005, and the chairman of Dixons Retail when it merged with Carphone Warehouse. He is currently the chairman of the UK’s largest housebuilder, Barratt Developments, and the president of the Confederation of British Industry (CBI).
CEO Dave Lewis joined in September 2014. Beforehand, he had worked for consumer goods giant Unilever for 30 years, where he steadily worked his way up the business to eventually lead its UK and Ireland operations.
Chief financial officer (CFO) Alan Stewart has been with the business since September 2014. Previously, he was the UK CEO and CFO of travel firm Thomas Cook and he has also been the finance director of WH Smith and the CFO of Marks & Spencer.
Chief operating officer (COO) Tony Hoggett joined in April 2017. He is a Tesco veteran that has worked his way up the business over 30 years, having previously led operations in several other countries.
Tesco major shareholders
The top three shareholders in Tesco are BlackRock (6.6%), Schroders (4.99%) and Norges Bank (3.99%), as of January 2019.
What is Tesco’s strategy?
Although Tesco technically remains in recovery mode following the accounting scandal that blew up in 2014, the supermarket has largely delivered its turnaround strategy and proven it is better shape than its rivals going forward. Tesco’s strongest characteristic is scale. It was already the largest supermarkets before it acquired Booker, the addition of which has also made it a formidable wholesaler. It also has a strategic partnership with French giant Carrefour that bolsters its buying power even further.
The supermarket has already found substantial cost-savings and efficiencies, but the integration of Booker still offers potential for more to be made. Tesco is aiming to deliver annual run-rate savings of £200 million by the third year of the acquisition. The cross-selling opportunities are only just starting to be realised too, with Booker ‘bulk buys’ being rolled out to just 70 Tesco stores so far. Similarly, Tesco has bolstered the amount of higher-margin own-label produce it sells thanks to Booker, with over 10,000 products now on offer.
Still, there are major threats facing Tesco and the larger supermarkets. Discounters continue to gain market share and undercut the bigger players and Amazon, which already has a small foothold in the UK grocery market following its acquisition of Whole Foods, is widely-tipped to make a big entry into the market in the future.
However, shareholders can take comfort with how Tesco is responding to these challenges. Its no-frills brand Jack’s, stocking just 1800 products, shows it is tackling the discounters head-on, and plans to cross-sell its multiple offerings through its loyalty Clubcard programme are encouraging. The company has spent serious sums to overhaul and refresh its Clubcard offering and now it is pushing the likes of Tesco Bank and Tesco Mobile onto its 17 million Clubcard holders. Clubcard holders (5.6 million of them) have opened a bank account with the supermarket (around one-third of the total) and app downloads and engagement jumped 34% in the last financial year.
Tesco has said it can do a lot more with its loyalty programme and has said it aims to add further value to its offering to help differentiate it from others. This is ultimately driven at improving the number of loyal customers, who tend to spend more, and the amount of Tesco products they use. This focus on leveraging data to improve sales and a greater emphasis on financial services and banking will bring big responsibilities for the supermarket, which will have to lend out more money and manage more people’s sensitive data as a result.
Tesco guidance: what are the supermarket’s targets?
The current financial year is a landmark one for Tesco as it will mark the end of its turnaround programme. The improvement in Tesco’s financial performance has been partly driven by the fact it has delivered many of its financial goals quicker than expected. For example, Tesco is aiming to deliver combined cost-savings of £1.5 billion by the end of the year but it has already locked in £1.4 billion of that. It is also aiming to deliver a margin of between 3.5% and 4% by the end of this year and, although its latest annual margin of 3.45% was just shy of that, its margin in the second half (H2) of 3.96% was spot-on and shows the company is moving in the right direction.
Tesco dividend: what’s the outlook?
Tesco shareholders have been rewarded for their patience during the turnaround. The dividend in the latest financial year was raised 92% - well ahead of expectations – to 5.77p from 3.0p the year before, when the dividend was reinstalled after being scrapped in the 2014-2015 financial year.
The 5.77p dividend was equal to 37.5% of its adjusted diluted earnings per share (EPS) and 42.5% of reported EPS. Tesco said its payout ratio will improve in the new financial year to 50% which means Tesco shareholders can expect a higher dividend going forward if the analyst consensus is correct. One-third of annual payouts are declared at the interim stage with the bulk being paid as a final dividend.
How to analyse Tesco: key figures
- Revenue, sales and Like-for-Like (LfL) growth: The difference between Tesco’s sales and revenue is in the inclusion of fuel income from the petrol forecourts. Sales is the best way to measure top-line growth from its core operations. LfL growth should be used as the main measure to identify the company’s current sales performance excluding newer stores or discontinued operations.
- Margin: Monitoring the margin is critical when analysing Tesco as improving profitability is a key aim of the business. This can also be used to make comparisons on Tesco’s profitability with its rivals.
- Operating profit: Tesco reports operating profit on both a reported and underlying basis, with the latter excluding exceptional or one-off charges. Underlying operating profit is a key measure used by analysts.
- Pre-tax profit: Tesco only reports pre-tax profit on a statutory basis and this represents the ultimate bottom-line result for the business.
- Retail operating cashflow: Tesco has to fund its ambitions from the cashflow it generates, including the dividend. Movements in cashflow are therefore extremely important in dictating Tesco’s spending.
- Dividend: The Tesco dividend should be in growth mode over the forthcoming years, with the firm targeting a payout ratio of 50% of earnings.
- Geographical performance: Tesco is slowly rebalancing its international operations. Central Europe and Asia both contributed more toward Tesco’s overall operating profit in the last financial year than the one before and this is expected to continue. Tesco details sales, revenue, margins and operating profit for each geographical region, and for Tesco Bank.
- Tesco Bank: Tesco Bank will become a bigger part of the business going forward. Shareholders should keep an eye on customer deposits, lending, net interest margin (NIM) and the risk-asset ratio to evaluate the bank’s performance.
- Clubcard engagement: With Tesco Clubcard set to sit in the heart of the business to bring its multiple offerings together it is important to monitor the performance of its loyalty programme, including user numbers. The success of Clubcard could be vital for Tesco’s overall success during a time when business is increasingly driven by data.
Tesco shares: the basics
Tesco shares are traded on the main market of London Stock Exchange under the ticker ‘TSCO’. The supermarket is a member of the FTSE 100 index, as well as the FTSE 350 (ex IT), FTSE All-Share, FTSE All-Share (ex IT), and FTSE Eurotop 300. There were 9.68 billion Tesco shares in issue as of 23 February 2019.
This information has been prepared by IG, a trading name of IG Markets Ltd and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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