What to do with TESCO in my HYP

[rebsamsuz]

Hello All, This is my first topic on TLF I was an infrequent poster on TMF and am in the building phase of a HYP to help with funds for retirement hopefully in 6 years or so. My question for you more experienced and knowledgeable folk "what to do with Tesco?" I have a median holding and am 24% down on capital, I have been patient, but cannot see when it will recover and start paying dividends again, so, I am thinking of selling up and reinvesting the funds into other HYP shares. Am I correct or should I hold on? thoughts would be welcome. Many Thanks

[OLTB]

"what to do with Tesco?"

Morning rebsamsuz

I am in the building phase like you and held Tesco previously - the tense there may tell you what I did with the shares! I am new to HYP and before following the HYP path decided to ditch Tesco during the first part of 2016 - no dividends and capital stagnation. I bought HSBC with the proceeds and since this decision have seen regular dividends and capital growth (quite a bit)! - Brexit decision and sterling weakness helped hugely...

This is just my experience and if I was doing the same now, SI might suggest I take a different path being strict about the pyad HYP 'rules' - not too sure.

I'm sure you'll get some different views!

Best, OLTB.

[Raptor]

If you are following "vanilla" HYP rules then you should leave well alone. However, how long do you wait?

I held my Lloyds shares purely as they were almost "worthless" and the cost of selling them was not worth the hustle. Now they are moving in the right direction. On the other hand I did sell my TSCO last year as they moved into positive capital value (for me) and I decided to put the money in another share to grow my income (I am partially drawing some income now).

If, as you say you are still in the build phase I would keep them and wait and see. After all in the last year the share price has risen somewhat but no dividend mentioned as coming along yet.

Raptor. (still has a small holding bonus shares lodged with registrar).

[Itsallaguess]

Hello All, This is my first topic on TLF I was an infrequent poster on TMF and am in the building phase of a HYP to help with funds for retirement hopefully in 6 years or so. My question for you more experienced and knowledgeable folk "what to do with Tesco?" I have a median holding and am 24% down on capital, I have been patient, but cannot see when it will recover and start paying dividends again, so, I am thinking of selling up and reinvesting the funds into other HYP shares. Am I correct or should I hold on? thoughts would be welcome.

Many Thanks

Ignoring the current loss of capital, given there's little you can currently do about that, I'd consider the following points on a dividend-cutter like Tesco -

1. When are they likely to re-instate dividends?

2. At what level (yield) are the re-instated dividends likely to be?

3. What yield could you attain now, with the yield-less capital currently sitting in TESCO shares?

I don't know the answers to the above, but I'd hazard a guess that you might be able to gain a 4 or 4.5% yield with little added-risk to the current TESCO capital, perhaps even a tidge more, even if it meant throwing it into an Income Investment Trust.

So if you can obtain a relatively risk-free yield now on the TESCO capital, what would be the advantages of holding on?

TESCO might announce a new dividend policy tomorrow that means the shares might yield about 6% at todays TESCO share price. I'd assume that if that were the case, then there'd be a bit of a rally in that share price so the yield settled at a lower level than the originally-announced yield. That's about the only way you're currently likely to see a good return over the short-term on TESCO. What's the chances of that happening?

That's not to say that over the longer-term you won't see a better return than that. They might announce a more limited dividend policy, starting at a much lower yield-on-current-price, and then ramp up that dividend over the next 20 years, who's to say? If that's the case though, there's less likelihood of a large capital re-rating over the short term, and your dividend returns might be a lot lower than current-alternatives for some time. What's the chances of that happening?

On balance, I'd personally think the second situation above is a lot more likely than the first, although no-one has a crystal ball of course. There's always a chance of jumping from the frying-pan into the fire with these situations, and that's specifically why I mentioned income IT's above, because I think in these specific situations, where dividend-income may have been cut completely, I think it's always nice to have a HYP 'dumping-ground' of favourite income IT's, where you can move such capital into a better 'working environment', with little comparative risk compared to possibly moving such capital into another single-share situation.

What I'd finally suggest is that you shouldn't ignore the 'emotional cost' of holding a share, especially one that's not paying you any dividends at the moment.

You're clearly not happy with TESCO, so ask yourself how you'd actually feel if they announced today that they were going to start paying dividends at a yield of, let's say 2.5%. They'd have satisfied your 'I want them to pay dividends' position, but would you actually be happy at that point? Even then, they might take another 6 or 12 months to actually announce such a poor return, so you're losing opportunity-cost all the time they decide not to pay any dividends...

Balance that against a scenario where you might be able to gain 4% in a widely-scoped income Investment Trust 'today'....Do you think there would be any 'emotional cost' advantages?

I know there would be for me, but these are questions you need to answer yourself, of course...

Good Luck with your decision.

Cheers,

Itsallaguess

[monabri]

Firstly, I'm not a TSCO share owner so cards on the table. I DO shop at Tesco ....AFTER shopping at Aldi first and then going to top up with stuff you can't get at Aldi ( exotic stuff...like weetabix type biscuits). The contrast between the two stores is marked.

The issue for me is that the management at Tesco seem to be ignoring the Aldi / Lidl threat. They could do SO much more but they aren't! Meanwhile, Aldi open more stores and upgrade their current ones.

Personally, if I had been a share owner I would rightly be annoyed as the management team are making me poorer whilst they are getting huge salaries.

If I did own Tesco shares I would have sold them long ago. Unless a miracle happens and the management start kicking derrière.

[Raptor]

The issue for me is that the management at Tesco seem to be ignoring the Aldi / Lidl threat. They could do SO much more but they aren't! Meanwhile, Aldi open more stores and upgrade their current ones.

If I did own Tesco shares I would have sold them long ago. Unless a miracle happens and the management start kicking derrière.

Evidence please, links to prove your point. If none then not relevant and off topic.

Raptor.

[Wizard]

The issue for me is that the management at Tesco seem to be ignoring the Aldi / Lidl threat. They could do SO much more but they aren't! Meanwhile, Aldi open more stores and upgrade their current ones.

If I did own Tesco shares I would have sold them long ago. Unless a miracle happens and the management start kicking derrière.

Evidence please, links to prove your point. If none then not relevant and off topic.

Raptor.

Gosh, if only facts can be posted and opinions are automatically off topic the volume of posts on this board is going to drop considerably

Terry.

[monabri]

The "evidence" is both on the balance sheet and this is further obvious when you go round say Aldi and Tesco - the former is swarming with activity and very few staff in small buildings whereas Tesco seems overstaffed (with "slow moving staff") and enough empty space to hold a footy match (despite the car parks being full). Or maybe it's just the Tesco stores I visit in the West Mids? What are Tesco doing about the new(ish) entrants to THEIR UK market (they "owned" the market in the UK at one point). All I have seen recently is the introduction of a camera/vehicle logging system which is a right P.I.T.A. to use (and it's outside in the cold) next to the smoker's den. Surely we've all been in a Tesco and an Aldi and seen this with our own eyes? The original poster asked for "thoughts" on the subject.

[monabri]

Key Fundamentals 25-Feb-12 23-Feb-13 22-Feb-14 28-Feb-15 27-Feb-16
Revenue (£ m) 63916.00 63406.00 63557.00 56925.00 54433.00
Pre-Tax (£ m) 4038.00 2057.00 2259.00 -6334.00 162.00
EPS 39.35p 33.76p 23.75p 4.14p 3.42p
PE 8.09 11.03 14.11 59.28 53.85
PEG 0.95 -0.78 -0.48 -0.72 -3.10
EPS Growth 8.52% -14.21% -29.65% -82.57% -17.39%
Dividend Cover 2.67 2.29 1.61 0.37 n/a
Dividend Yield 4.63% 3.97% 4.40% 4.60% 0.00%

[tjh290633]

I hold Tesco, having first bought in 1997 when they were yielding more than Sainsbury (just over 3% actually). That was at 377p, but they had a 2 for 1 scrip issue soon afterwards, trimmed back 25% in 2008 at 373p, added twice in 2012 at about 320p, and twice more in 2014 at about 295p.

We have had two years without dividends, but I am hopeful that they will be resumed, possibly with the final for the current year. I am patient in these circumstances, where the biggest grocer in the land is recovering from a major accounting setback, and by all accounts is now doing relatively well. The personal experience of our local Tesco would confirm that, but I can't comment on the German invaders, as they are not conveniently sited. As they are almost exclusively "own brand" it is difficult to compare them.

My IRR is 9.2% and my average cost per share is 204p. I don't suppose that the dividend will get back to 14.76p immediately, but half that would be a start. The full year results will be out in April. I would hold until then.

TJH

[Dod1010]

Itsallaguess has given the OP an excellent summary of his position and he can decide from that but I would sell and would have sold them long ago had I held them (which I never have). I think the retail market in the UK is in such a state of flux at the moment that it is simply not possible to know what is likely to happen. Tesco however seem to be stuck with a lot of spare retail space that they cannot offload otherwise their Tesco Extra stores would not look like spacious aircraft hangars. That must be restricting their ability to cut costs and of course since they have the space, to cut the number of lines too much they will have even more empty space.

Add in the increasing inflation and shoppers will once again be turning to the discounters like Aldi and Lidl (if they ever went off them). I think you either have to be premium like M & S Foodstores and I assume Waitrose (where their well heeled customers do not seem to mind what the cost is, for 'quality''), or a discounter to be sure of your customer base these days. The supermarkets are caught in the middle where people will migrate to some extent both up and down.

Dod

[Arborbridge]

The "evidence" is both on the balance sheet and this is further obvious when you go round say Aldi and Tesco - the former is swarming with activity and very few staff in small buildings whereas Tesco seems overstaffed (with "slow moving staff") and enough empty space to hold a footy match (despite the car parks being full).

I find the comment about staff a little off the wall. My impression is that people complain that there usually aren't enough staff to help customers, yet here is monabri complaining of too many staff. My general feeling with shops these days is there are very few people around to give assistance, so if there is an input of people into Tesco, I would see that as a positive, provided they are well trained. Having a large space with wide aisles is also a big advantage. Who wants to be crammed in and slowed down by all those trolleys causing gridlock? The pace becomes that of the slowest and shopping is then a real pain.

What are Tesco doing about the new(ish) entrants to THEIR UK market

.
Competing, I assuming. Didn't their market share go up recently? And certainly our local one is very busy.

All I have seen recently is the introduction of a camera/vehicle logging system which is a right P.I.T.A. to use (and it's outside in the cold) next to the smoker's den. Surely we've all been in a Tesco and an Aldi and seen this with our own eyes?

I've no idea what this is referring to. In all the TESCOs I know one just drives in and parks. It sounds like some retrograde system is being introduced, which isn't good. Maybe in towns where space is at an extra premium?

If I may say so, your style of writing suggests you have some emotional axe to grind here. Perhaps you have had some unfortunate experiences in your Tescos which have "informed" your opinions. Whilst I'm not wild about TESCO and never have been, it seems a decent enough place to me. I've been in a couple of Aldis and would think it unfortunate if I ever had to go in another one: it wouldn't be my first choice for a shopping experience, but probably fifth choice. That doesn't make Tesco a good investment, because my opinion about shopping seems to be in the minority eg there's nothing, but nothing that would induce me to order clothes online. But I gather people do.

Arb.

[Raptor]

One of the first things David Lewis said was that Tescos hsd tsken too many staff off the "floor" and wanted to address that. Now as to training and quality, I cannot comment as I now work for them (obviously where I work the customer service has vastly improved, ).
As to the parking, I think that is part of local initiatives about who is using the car park. In fact my local LIDLs has that system and only allows 40 minutes parking before issuing tickets automatically, has not been taken well by the locals.

IMO, they are going in right direction but still a lot to do to change the structure. Remember 1000 going from distribution and other initiatives still going on.

Raptor.

[Arborbridge]

Getting back to the point; that of selling or not. It is very tempting indeed to sell out now and put the capital into something which is currently perceived as "better". My trouble is, that that is precisely why I bought Tesco in the first place! - it was exactly that. I sold Old Mutual which had disappointed with its divdend, and bought Tesco, which came highly recommended due to its dividend paying record, and owing to its being "best in class". So much for my skill at tinkering.

The contrary argument to selling is: having undergone the pain, why not wait for some gain? The company is apparently going in the right direction, and there is a good chance that a dividend could be paid within the next 18 months. At that point, the price will tick up - quite possibly more than any other share I'd invest in which is not just re-establishing a dividend.

It's finely balanced, as ever, with no clear cut right or wrong way.

[Ivyrobert]

Own shareholding bought after a drop in price. For over a decade before, it was super duper and I watched it with envy, nursing my Sainsburys and Morrison. Bought it again on the next drop before Dave came in and "Kitchen sinked"the job. Sad for me, but although hearing Dodd's valued advice to sell and move on, I didn't heed it and will wait until it recovers.
The supermarkets take £3-6k a year off many households. They need the competition from Aldi and co but it won't be plain sailing for those companies either. They are all taking actions to improve!
I will continue to hold.
I am still disappointed how many blue chip HY shares, over the last few years, have blown up, replaced the CEO, kitchen sinked the balanced sheet and dumped the divi. But, really, this has always gone on and I have become more diversified as a result.
I also value greatly the diverse opinions expressed on these boards.

[jackdaww]

in late 2011 tesco were over £4 and i decided to sell being uneasy on the valuation .
the profit warning beat me to it .
i managed to get out at around £3 and most of the cash went into astra and imperial tobacco , which have since paid good divis without a SP cliff fall.
would i sell now? probably yes - i dont like the debt / pension deficit .
i also dont go there , except for a 50p newspaper and the free car parking , i prefer ALDI quality and value.

my morrisons SP have recovered and still pay a dividend and i continue to hold .

[YeeWo]

Code: Select all

Date      | Type       | No.   | SP     | Price       | Fee    | XIRR flow  | Divi   |         
25-Sep-14 | BUY        |  5680 | £1.938 |  £11,008.69 | £69.06 | £11,077.75 |        |         
09-Oct-14 | BUY        |  4320 | £1.866 |   £8,061.77 | £53.32 |  £8,115.09 |        |         
19-Dec-14 | CASH DIVI  |       |        |    -£116.00 |        |   -£116.00 |  0.016 |         
13-Jan-15 | SELL       | -2500 | £2.118 |  -£5,293.75 | £12.95 | -£5,280.80 |        |         
04-Mar-16 | SELL       | -3750 | £1.894 |  -£7,102.16 | £12.95 | -£7,089.21 |        |         
20-Jun-16 | BUY        |  3750 | £1.612 |   £6,043.13 | £40.27 |  £6,083.40 |        |         
06-Oct-16 | SELL       | -3750 | £2.028 |  -£7,605.00 | £10.50 | -£7,594.50 |        |         
20-Jan-17 | CURR. VAL. |       |        |             |        | -£7,436.25 |        |         
          |            |       |        |             |        |      7.41% | XIRR   |         
          |            |       |        |             |        |            |        |         
          |            |       |        |     4996.68 | 199.05 | £ 5,195.73 | £ 1.39 | Avg Price
          |            |       |        | Share Price | £ 1.98 | £ 7,436.25 |        |         
          |            |       |        |             |        |     43.12% |        |         
          |            |       |        | MoS/Loss    |        | £ 2,240.52 |        |         


The table above is my dealings in Tesco shares. I'm in a similar dilemma to the OP. My reading of the last trading update from the business was that the decline in market share has been arrested, the distribution network is losing many staff and therefore will become more cost effective and generally the Tesco business is improving. Beyond this Tesco's International business is booming and the decline in Sterling will enhance the result for Tesco while helpfully dampening the benefits of a UK business for Aldi and Lidl when they repatriate their earnings back to Germany in Euro(s).
In conclusion I'll hold on until the dividend is reinstated and make a definitive decision then.

[rebsamsuz]

Many Thanks for all your comments I think I will wait till April and see how it goes then make
the decision to sell or not. rebsamsue

[JohnnyCyclops]

In recently looking to buy British Land Co (Real Estate), and checking the share price on Google Finance, Google helpfully suggests half-a-dozen other companies to compare to on its charts. and in BLND's case the first two were Tesco and Sainsburys. Not saying Google is always right, but in this case it's pointing to TSCO possibly being a real estate business, with a smattering of retail on top

Not knowing the Aldi / Lidl model, and having none near us (and no Tesco either), I wonder if they will be owning or leasing their premises.

We bought TSCO for the HYP in Jan and Apr 2012, and have held on since the dividend was stopped, in expectation the dividend will be reinstated.

While I welcome Itsallaguess' good analysis earlier, missing from it was diversification. If we sell the shares that stop paying, that concentrates the remaining stocks/sectors, and who's to say which firm will have problems next year (e.g. BT or Pearson!), and do we sell those out too. We'd then be lacking Telecoms, Retail and Media stocks. And if we sell Company A to buy Company B, do we have enough insight into B's business to know it too won't have the same problems as A. Not even the Tesco board seemed to know of the accounting issues it would face. I'd say the same is true for BT's recent woes. The market, including professional fund managers, also didn't know it was coming, else it would have been priced into the share prices. What chance us humble small investors to know? Diversify!

In a HYP of 30-40 stocks I think I'm going to have to get comfortable that at any point in time one (or two!) of them may have halted dividends. Recently it's been Balfour Beatty and Tesco. Although in BBY's case they've just restated the dividend, and I'm hopeful TSCO will too.

[Dod1010]

In recently looking to buy British Land Co (Real Estate), and checking the share price on Google Finance, Google helpfully suggests half-a-dozen other companies to compare to on its charts. and in BLND's case the first two were Tesco and Sainsburys. Not saying Google is always right, but in this case it's pointing to TSCO possibly being a real estate business, with a smattering of retail on top

Not knowing the Aldi / Lidl model, and having none near us (and no Tesco either), I wonder if they will be owning or leasing their premises.

Tesco has about £13 billion of freehold assets out of a total of around £15 billion so I should think they own most of their real estate. That of course is one of their problems. A bit like M & S they will find it very difficult to downsize especially their Tesco Extras. (which is why I have no doubt that there is now lots of space in them, even after subletting to people like Timpson) The trouble about calling it a real estate business is that if it is to be called that it is a very specialist one. They have been offloading development sites (their land bank) but will find it very difficult to sell a Tesco Extra I should think.

Dod