Tesco is one of the worst FTSE 100 performers of the decade. Of course I’d buy it
Well the decade is over, and its been a great one for investors. Weve had 10 years without a recession, and markets have flown as a result.
They say a rising tide floats all boats, but the longest bull run in history has left behind a number of top stocks, as every bull run does. Can thisFTSE 100flop continue to claw its way back? Im optimistic that it can.
Oh, no, its Tesco
If you bought grocery superheroTesco (LSE: TSCO)on 27 December 2009 you would have paid around 427p. Today, the Tesco share price trades at roughly half that, 255p, which means you will have lost around 40% of your money
You would have recouped some of this from dividends, but not so much, given that Tesco scrapped its payout for three years from 2014 and is only slowly rebuilding it. Currently, the stock yields just 2.29%.
Then just imagine the opportunity cost of what you could have put your money into instead.
Former boss Philip Clarke left Tesco in 2014 after issuing another profit warning, blamed variously on tough trading conditions in the UK, the challenge from German discounters, failed global expansion plans and a frightening 22bn debt pile.
Dave did it
Dave Lewis, who joined from Unilever that same year, got off on the right foot and stayed there. Happily, he wasnt to blame for the accounting scandal soon after his appointment, but instead won kudos for taking swift action to expose it. Nor was he blamed for the 6.4bn loss in his first year, which included the one-off 7bn cost of a head office job cull and write-downs on store values.
Lewis dumped unprofitable electricals, closed its separate clothing and homeware website Tesco Direct, sold the Dobbies garden centre chain, made a string of asset disposals including South Korean chain Homeplus for 4bn, and snapped up cash-and-carry giant Booker for 3.7bn. He also fought and survived a brutal supermarket price war.
Shore Capital analyst Clive Black even described him as the bloke that saved Tesco, and I wouldnt argue with that.
Downs and ups
Its a sign of how bad things got at Tesco that it is still the worst FTSE 100 performer over the last decade despite rising 43% in the past five years. However, at todays price of around 250p, it is still well below its 4 peak.
Would I buy it today? To my surprise, I would. I say surprise, because the grocery sector is tough. Aldi and Lidl keep coming. Tescos market share keeps getting nibbled away. Operating margins are just 3.4%, and expected to fall to 3.1% next year. Lewis is leaving.
Earnings growth looks set to slow, from a bumper 65% in 2017 and 82% in 2018, to 13%, 9% and 9% over the next three years. However, that is still pretty steady.
The forward valuation of 14.88 times earnings is not too demanding, below the FTSE 100 average of 18 times. The forecast yield is below average at 3.2%, but it is covered 2.1 times and forecast to climb to 3.6% and beyond over the next few years.
Tesco has a fight on its hands, but will hopefully perform much better over the next 10 years, than the last 10.
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