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Tesco back on top

The group has moved back over the billion pound sales mark and announced a return of the full-year dividend
April 11, 2018

The annual dividend is back at Tesco (TSCO). Britain’s largest supermarket released a strong set of annual figures, putting the 2014 accounting scandal firmly in the past and quashing fears over rising competition from discount-led rivals. The supermarket has grown sales, margins and profits, and successfully sealed its recovery with the completion of its Booker merger post period-end.

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Analysts seem to agree that Tesco’s “laser-like focus” on its core UK food business has underpinned its return to form, although wider price inflation across the UK grocery industry has lent a hand too. Together these factors pushed core headline revenues up 2.3 per cent to £51bn, while the final quarter marked a ninth consecutive period of like-for-like sales growth. Richard Lim, chief executive at Retail Economics, said Tesco also benefited from shoppers trading down to own-brand labels (incidentally, higher margin) as household budgets come under increasing pressure thanks to rising costs and stagnant wages. Meanwhile, Tesco's online segment continues to be a major contributor to the group's resurgence, outpacing all other sales channels as geographic coverage, speed of delivery and average basket values all improved.

Tesco has also spent time sorting out its balance sheet – no mean feat during a year that saw it complete one of the stock market’s most high-profile mergers. Cost savings of £594m brought total savings to date up to £820m, inching closer to the group’s medium-term target of £1.5bn. A further £2.8bn-worth of generated retail operating cash, a £499m working capital inflow and 109 property disposals all helped bring more money into the business, while driving down debt by close to a third.

As for Booker, Tesco says it still expects to deliver around £200m-worth of synergies from the just-completed deal, with around £60m of that due in the first year of ownership. As per the wholesaler’s last set of results, top-line growth remains strong, as does cash generation.

Analysts at Shore Capital still expect pre-tax profits of £1.62bn for the year ending February 2019, giving EPS of 15.1p, up from £1.28bn and 11.9p in FY2018.

TESCO (TSCO)   
ORD PRICE:222pMARKET VALUE:£21.7bn
TOUCH:222.2-222.4p12-MONTH HIGH:223pLOW: 165p
DIVIDEND YIELD:1.4%PE RATIO:18
NET ASSET VALUE:107p*NET DEBT:25%
Year to 24 FebTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
201463.62.3012.114.8
201556.9-6.30-69.61.2
201653.90.203.20.0
201755.90.150.80.0
201857.51.3012.13.0
% change+3+795+1396-
Ex-div:17 May   
Payment:22 Jun   
*Includes intangible assets of £2.66bn, or 27p a share