May 2022
Tesco PLC
has appeared on our screen for the very
first
time since we started researching the UK stock market in 2017.
But why?
The retail giant released
preliminary results
for 2021/2022 in April, reporting an annual
profit rise
and the launch of a new
£750 million
share buyback scheme.
However, shares in the supermarket chain were trading
5.7%
lower at
255.10p
on the day of the results, as the Chief Executive hinted at a possible
profit hit
in the year ahead amid inflationary pressures and normalising consumer behaviour post-pandemic. The share price has since risen to
272.00p, but our metrics are telling us this still seems
low
based on Tesco's overall financials.
On the whole, the preliminary results for the year were
strong. Up until the 26th of February, pretax profit has ballooned to
£2.03 billion
from
£636 million
the year prior: - Revenue rose
6%
to
£61.34 billion
from
£57.89 billion
- Group sales increased
2.5%
to
£54.77 billion
from
£53.45 billion
- Like-for-like sales in the UK & RoI were up
2.2%
- Group retail sales advanced
2.3%
Strong results combined with a drop in share price? A combination that always gets us excited at the
Compounding
Club.
The drop can almost certainly be attributed to the
cautious remarks coming from Chief Executive Ken Murphy and subsequent full-year guidance:
"Clearly, the external environment has become more challenging in recent months. Against a tough backdrop for our customers and with household budgets under pressure, we are laser-focused on keeping the cost of the weekly shop in check - working in close partnership with our suppliers, as well as doing everything we can to reduce our own costs."
For the financial year 2023, Tesco is guiding for retail adjusted operating profit between
£2.4 billion
and
£2.6 billion
- which would be just below the
£2.65 billion
registered in 2022.
"Over the last year, we delivered a strong performance across the group, growing share in every part of our business. We did this by staying focused on our customers and doing the right thing for our colleagues, our supplier partners and the communities we serve. I want to thank all of our colleagues who did a brilliant job navigating the ongoing pandemic, dealing with the supply chain challenges in the industry and tackling the onset of increasing inflation," said CEO Murphy.
Overall, a very good start to the year but cautious guidance for the rest of 2022.
Tesco also declared an annual dividend of
10.90p, rising from the
9.15p
distributed the year before, making this the 5th year of
increasing dividend payments
in a row. Alongside this, the firm will buyback
£750 million
worth of shares over the next twelve months, which will transfer even more
value
to the shareholders.
- Revenue rose 6% to £61.34 billion from £57.89 billion
- Group sales increased 2.5% to £54.77 billion from £53.45 billion
- Like-for-like sales in the UK & RoI were up 2.2%
- Group retail sales advanced 2.3%
A
key reason we feel this is the right time to buy into a company like Tesco is that consumer staples and
grocery retailers tend to be
very safe bets
during a
recession, and there are a few indicators pointing to some rocky times ahead
for the UK and global market.
This period of relative
uncertainty could be a great time to buy into this
reliable
company, which has been around for over 100 years, at a time when it is looking
undervalued
relative to its financials.
Conclusion
Sometimes an opportunity arises to get buy into
great
companies at a
great
price. Tesco appears to be bouncing back after a couple of
difficult years, and despite cautious guidance for the full year, we really like Tesco's
financials relative to its current share price.
Tesco's
dividends and a share
buyback scheme look set to transfer even more
value back to its shareholders in 2022. It could also be a smart play if a
recession hits the UK market in the near future.
We will be adding the company to the CC portfolio tomorrow morning.
