Tesco investors welcome back dividend

The announcement backed up management’s confidence that Tesco’s recovery is well under way. Indeed, interim sales, ex VAT and fuel, were at the top end of analyst forecasts at £25.2bn – up 0.7 per cent on a like-for-like basis and buoyed by currency movements. But that growth slowed in the second quarter as the previously strong uptick in Asian revenues reversed to an 8.9 per cent decline. The problem? Management withdrew from its Thai business early in the year after it weighed on growth in the first quarter. Central Europe also endured a reshuffle and the closure of underperforming stores sent like-for-like revenues here down 0.9 per cent.

The good news is that growth in the UK business (78 and 62 per cent of like-for-like revenues and operating profit respectively) is accelerating, despite continued pressure from competitors. Tesco has sidestepped a big exodus of customers to the discount retailers by keeping prices as low as possible despite the inflationary environment. Average food price increases were held at a lower level than the rest of the market, while customer transaction numbers rose by 0.4 per cent.

But a new threat has recently emerged from Amazon’s expansion in the grocery sector. Tesco’s shares suffered in the summer after the US tech giant bought Whole Foods, but the UK group has since enhanced its online offering in a bid to retain home delivery customers. Online grocery sales rose 4.6 per cent in the period thanks to an increase in both order numbers and basket size.

Reported profits were boosted by the absence of £200m of exceptional finance costs and lower restructuring expenditure, but even on a like-for-like basis, operating profits rose 24 per cent to £759m. However, analysts at Berenberg don’t think this slight margin recovery is quite enough. The broker is forecasting adjusted EPS of 9p in the year to February 2018 (6.8p in FY2017) on a 3 per cent increase in revenues – below consensus estimates.