Hargreaves Lansdown Tips for 20217 Jan 2021 14:34
Good to see HL promote TSCO as one of their 5 picks for 2021 (extract below):
With almost 3,800 stores in the UK and Ireland, Tesco is a retail titan. But when you’re big, growth becomes a challenge.
Tesco’s answer is online shopping. That footprint puts it in a strong position to capitalise on the long-term digital shift sparked by coronavirus. 25 UK urban fulfilment centres are expected to open in the next three years, and online capacity is set to double to 3.0m delivery slots a week.
This opportunity sits on top of an already thriving store business. The pandemic hasn’t done anything to deflate its dominant market share.
Tesco recently completed a plan to rebuild operating margins, up from 1.8% in 2016 to 4.6% in 2020. The other aspect of the corporate tidy-up includes selling less compelling parts of the business, in Poland and Asia. This doesn’t just provide sturdier foundations, the sale of the Thai and Malaysian business equates to a cool £8.2bn of cash. About £5bn of that will come back to shareholders as a capital return via special dividend.
That brings us to Tesco’s yield. It’s a market-beating 3.9%. That’s higher than it has been for most of the last 5 years. Remember though, no dividend is guaranteed and yields are not a reliable indicator of future income.
An improved pricing proposition is helping Tesco poach customers back from Aldi too. But pricing pressure remains an industry-wide issue. Consumers always want more for less, and the recent sale of Asda raises the possibility of another margin-diluting price war. Coronavirus has also dented margins, including hiring 45,000 extra members of staff at the peak of the crisis (16,000 are now permanent). Don’t expect rocket-fuelled profit this year, operating profits are expected to be 25.3% lower.
Change brings execution risk too, especially as a new CEO was welcomed in October 2020. We’d like Ken Murphy to set out his strategy sooner rather than later.
But when all’s said and done, Tesco’s primed to make the most of the shift to online, while the store businesses keep simmering away. Reliability is something of a rarity in today’s stock markets, and with a PE ratio of 13.7 that makes Tesco stand out.
HL’s non-executive Chair is also a non-executive director at Tesco.
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