Tesco defies pressure from discount retailers in latest results

Dividend has now been raised to almost double last year’s pay-out.

Article updated: 10 April 2019 11:00am Author: Ian Forrest

  • Core strategy remains strong as Tesco beats market expectations with strong results, the shares remain a ‘low to medium risk’ hold.
  • Increasing profit margins and effective cost reductions have allowed Tesco to raise dividend by almost double from the previous year.
  • Defensive element to shares should be seen as a positive to investors during uncertain economic times.

Tesco beat market expectations with its full-year results today and the benefits of its restructuring programme are flowing through into a big boost for investors in the form of dividend increases. Revenue and pre-tax profit increased by 11% and 29% respectively, partly thanks to a strong 1.7% increase in like-for-like sales in the UK. The company’s recovery mirrors that of the wider food retail sector supported by the latest Profit Watch UK data showing a 28.2% rise in profit in the last quarter of 2018.

Cost savings appear to be paying off

Tesco’s effort to reduce costs was evident with its profit margin rising to 3.96% in the second half of the year, up from 3.45% in the first six months. All of this enabled the company to raise dividends to 5.77p, almost double last year’s pay-out.

Given the good figures it was no surprise to see the shares rise 1.5% in early trading, despite having already comfortably outperformed the market so far this year. The performance is really a validation of the strategy adopted four years ago by CEO Dave Lewis and comes as the company faces strong competition from discounters Aldi and Lidl.

Our View on Tesco - Hold

The fact that the Sainsbury’s/Asda merger now seems unlikely to go ahead provides another boost and the defensive element to the shares should be viewed as a positive with so much economic uncertainty. The shares remain a low to medium risk ‘hold’.

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Ian Forrest

Investment Research Analyst

Ian’s background in investments, financial journalism and research has seen him advising private investors on equities and helping to manage portfolios. His qualifications include the Certificate in Financial Planning and the Chartered Institute for Securities & Investment’s Investment Advice Diploma.