Shares magazine17 Dec 2025 11:57
Julian Bishop, co-manager of Brunner (BUT), on why the trust invests in Tesco (TSCO):
“Within the consumer staples sector, ‘retail distributors’ such as Tesco have been regarded as inferior to their consumer product counterparts such as Unilever and Nestlé. Tesco’s reputation was also marred in the mid 2010s by an accounting scandal, competitive issues and a balance sheet burdened with a large pension deficit and excessive debt.
“Much has changed since. Tesco’s net debt to Ebitda, a measure of financial leverage, has fallen from five times to 0.5 times when we exclude leases. The company has extended its leadership in the UK grocery market to a market share of around 28 per cent, nearly twice that of the next largest competitor. This affords it scale advantages in procurement and the leverage of overheads, resulting in a profit margin meaningfully above its peers.
“The market is undoubtedly competitive. However, two key competitors – Asda and Morrisons – are labouring under levered private equity ownership and have become consistent share donors. The rise of discounters such as Aldi and Lidl appears to be approaching its natural limit. On balance, we think the competitive intensity of the market is stable or possibly even improving. This contrasts with the market for branded consumer products, where growing competition is measurable in most segments.
“The grocery market is also growing at a surprisingly robust pace. The high cost of eating out is pushing people back to eating at home; the reversal of a long-standing trend. As anyone paying attention to their supermarket bill will also have noted, food inflation is persistent.
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“Tesco sells the literal basket of goods from which inflation is measured, so this reflects the company passing through its higher running costs. This inherent inflation hedge protects its profits in real terms.
“This combination of circumstances has resulted in a surprisingly brisk growth in sales and profits, ahead of the likes of Nestlé. With a fully repaired balance sheet, the cash component of these profits can be returned to shareholders as dividends and buybacks.
“The current dividend yield is 3.2 per cent. When we include the buybacks, which should be thought of as an automatically reinvested dividend, the total cash return yield is around double that.
“A crude cartoon of the investment case for Tesco is the following. You receive substantial cash returns each year. Because of the company’s very strong competitive position, perennial relevance and the economically insensitive nature of its business, that cash flow stream should be reasonably reliable. Over time it should grow due to inflation and population g
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