Friday, 29 August 2014

Tesco Trading Update - Dividend Cut!

In a surprise move this morning, Tesco have issued a trading update warning that profits will be less than originally forecast and the interim dividend is to be cut by 75% (link via Investegate).

The appointment of new CEO Dave Lewis is being brought forward by one month and he will now start 1st September.

Tesco say they now expect full year trading profits to be in the range of £2.4bn to £2.5bn - down from £3.3bn last year and below the previous guidance of £2.8bn.  Trading profit for the six months ending 23 August 2014 is expected to be in the region of £1.1bn.

They are also taking the axe to capital expenditure. For the current financial year this will now be no more than £2.1bn, some 16% less than originally planned and a reduction of £0.6bn from the previous financial year.

As a result of this announcement, the share price has slumped and is currently down around 5% at 230p at the time of posting. The chart for the current year is not a pretty sight!

1 yr share price chart
(courtesy of Digital Look)

So, what to do? The options are fold (sell), hold or be bold (buy more). My resolution for this year is not to tinker too much with the portfolio. Selling now would crystalise a capital loss so this is not an attractive option. However, I do not feel confident enough to buy more but have a sneaky suspicion this could well be the better option. For the time being I will do nothing and see how the new management perform and await their decision on the final dividend - if that was to be slashed by the same amount as the interim...mmmm.

Be interested to hear what others would do - leave a comment if you hold Tesco or have a view.


10 comments:

  1. Hi John,

    I've owned Tesco since 2012 and my general approach with dividend cuts is to do nothing on the assumption that the dividend cut is for the long-term good of the company.

    It can take several years to find out if that's true or not, and it helps if you're widely diversified because the subsequent share price drop is less stressful if the holding was 3% of your portfolio rather than 10%.

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    1. Hi John,

      Thanks for dropping by. Yes, it pays to have a diversified portfolio - Tesco represents around 4% of my shares sector (maybe 3% after todays fall).

      It is of course widely held by several of my investment trusts, so that is a factor. I was encouraged to see Alastair Mundy at Temple Bar has been accumulating in recent months - perhaps he will be adding a few more at these lower prices!

      As you say, the cut is for the good of the company and a wait-and-see position may be the right thing for now.

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  2. Glad I chose SBRY over TSCO as my first "Food & Drug" retailer now. It was a close call back in November 2011. Question is will SBRY now use this as an excuse to raise the white flag and not continue the fight.

    Not surprised by the move TBH. New CEO coming in has to depress the share price as much as possible by making as many problems visible as possible. How else is he going to maximise the return from his options, sorry demonstrate how much value he's generating for shareholders, sorry...

    BTW grabbed Amlin today as HYP share number 10. Hopefully write up in the near future.

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    1. Thanks for leaving a comment RIT and yes, looks like SBRY was the better choice although it too is not immune from the increasing competition from Aldi & Lidl and its share price has fallen considerably in recent months plus the departure of its CEO.

      These difficulties have a way of sorting themselves out over time but will it be 1, 2 or 5 yrs and whats in store for the final dividend? I see our friend Jeff @ 'Seeking Value' blog has decided to offload and reinvest elsewhere.

      Look forward to reading the write up on Amlin - the HYP bandwagon is picking up pace this year!

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  3. Sainsbury's has a better dividend record doesn't it? Plus, they're doing a discount strategy through the use of Netto... I have some knowledge of what Tesco are doing through a family member (it's not insider info) and my money is on Sainsbury's

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  4. Hi TV,

    Thanks for leaving a comment. I guess the answer depends on your time-frame. Sainsbury got into difficulties around 10 yrs back when King took over and the divi was slashed by over 50% - it is now just about back to where it was in 2003...and if they have done it once...Since that time, they have done a lot better and the dividend growth has been impressive - lets hope the new CEO at Tesco can turn things around as well as King (who has now departed). As far as I know, Warren Buffett still retains a significant stake.

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  5. hello john - i decided to sell my tsco and booked a large loss on monday. i feel it's inevitable the final dividend will go the same way. to me the income was the reason i bought the stock in the first place, without it there is no real attraction. i would probably have had to wait a few years for it to get back to my buy price of just under £3 so rather than hang on i decided to buy bset with the cash from the sale, a steady and reliable income deliverer which is at a significant discount to NAV. i also used the loss on tsco as an opportunity to book a gain on lgen and swapped them for pson which delivers a greater yield. i had had a good run on lgen. i have also factored in a 50% cut in dividend for my sbry shares! this has all been very tiresome, my goal is to be a passive investor and i bought tsco thinking it was a no brainer. never mind, one lives and learns! - jason

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    1. Hello Jason,

      Thanks for your message and sorry to learn of your loss on Tesco shares. I think quite a few small investors who need income will be doing the same and looking elsewhere. If they cut the final divi by the same amount, it will give 3.69p for the year and a yield of just 1.6%.

      My feeling at this stage are that maybe the cut will not be so severe - they wil still make a substancial profit and earnings should be above 20p so hoping for a reduction of maybe just 50%, but as you say, it may be some time before the share price and dividends return to previous levels.

      I briefly held British Assets Trust in 2011/12 but found that although the yield was reasonable, the dividend growth was weak compared to some of my other trusts but that may have improved recently - I have not kept tabs.

      Good luck with BSET and your recent acquisition of Pearson.

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  6. Hi,
    I am in the US at the moment and the similarities between the big Walmart stores and the Tesco equivalents are striking. Walmart try to sell everything from food, to (or through) clothing, electronics and even hunting equipment. Tesco seemed to be following the same model until it came unstuck, but now it is not really clear to me what model they are following. It will be fascinating to watch where the new management team take the company - why not use their scale and dividend cash saved to launch a full on price war with its rivals? Short-term pain for long-term gain?

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  7. Hello FI,

    Enjoying your 'off topic' holiday updates - some of my favourite music came from the areas you are visiting - Jelly Roll Morton, Sam Cooke, John Lee Hooker, BB King and Elvis - but some of the names you mention.. my education is expanding! Enjoy the rest of your hols and bring me back some of those grits!

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