Why Tesco shares could have further to fall

It's certainly a stock in trouble and sentiment is against it, from bulletin boards to fund managers few have anything positive to say about Tesco.

Any cut in dividend will see income investors dump Tesco in droves


Why Tesco shares could have further to fall

Tesco shares are deeply out of favour with investors and have fallen 39% since the end of 2011. Yet, they could fall further if rumours that it is to cut its dividend to preserve cash become fact.

It’s certainly a stock in trouble and sentiment is against it, from bulletin boards to fund managers few have anything positive to say about Tesco. Even the resignation of its chief executive, Philip Clarke bought only a brief respite before its share price fell further.

Its new chief executive Dave Lewis has a massive multi-year challenge if he is to turn the retailing behemoth around and it will necessitate restructuring and cost-cutting.

There are few easy options for the management and if they’re to take bold actions, it is best to act early, ‘kitchen-sink’ the bad news and move on. He doesn’t officially start work until 1 October, so the price is likely to fall further before then.

If, Gladiator-style, Lewis unleashes ‘hell’ on Tesco’s competitors in the form of a price war, margins will certainly suffer in the short term. Although, if turnover and market share subsequently increase overall profitability should recover in the medium term.

To buy or not?

In the short term, those thinking of buying at current levels should be careful as there seem few catalysts for the shares to rebound. Thus, Keith Ashworth-Lord, who manages the ConBrio Sanford DeLand UK Buffettology fund, has warned that it may be a value trap.

Indeed, Tesco’s share price may have much further to fall. There have been rumours that is likely to cut its future dividend, which stands at around 5.7% for the full year ending 28 February 2015.

Noted retail analyst Nick Bubb told Every Investor that he believes a cut is “quite likely…although not necessarily at the interims”.

While Moody’s downgraded Tesco’s credit rating to Baa2 from Baa1 back in June, its lead analyst on Tesco, Sven Reinke today commented: “Should Tesco report weaker than expected numbers at its interims then it could be a viable measure to reduce the dividend.”

Reinke explained: “Reducing the dividend would be a positive for Tesco’s credit profile and eases pressure on its rating. This is because the cash-flow after paying for capital expenditure and dividends has been negative over the past couple of years. However, it could also improve its net cash flow by further reducing its capital expenditure.”

Certainly, if Tesco does cut its chunky dividend to preserve cash, you can expect hefty selling by income funds that hold it for that very dividend. This would likely drive the price down substantially further, much nearer to 200p than 250p.

Buying opportunity

It’s at that stage that Tesco becomes a much more interesting proposition. At that price level there would be a good margin of safety for those buying in. After all, as every wise shopper knows, the best time to buy is when something is on sale.

Moreover, a successful turnaround over the course of a few years followed by gradual dividend increases could then see its share price rise substantially.

The writer holds shares in Tesco

Tesco Shares & Equity Release

What Is Equity Release?

Equity release is the use of financial arrangements that provide the owner of a house, or other property, with funds derived from the value of the property while enabling them to continue using it.

How Does Equity Release Work?

Equity release is aimed at homeowners aged 55 and over. It allows you to take some of the value of your home as cash.

Financial cash flow to Equity Release

Cash flow from financing activities (CFF) is a section of a company’s cash flow statement, which shows the net flows of cash that are used to fund the company. Financing activities include transactions involving debt, equity, and dividends.

Editorial Note: This content has been independently collected by the EveryInvestor advisor team and is offered on a non-advised basis. EveryInvestor may earn a commission on sales made from partner links on this page, but that doesn’t affect our editors’ opinions or evaluations. Learn more about our editorial guidelines.
Taylor Holt - 300x300

Written by
Taylor Holt
Estate Planning Expert

Taylor Is Our Resident Estate Planning Expert. He Knows That Everything Revolving Around Wills or Funeral Planning Can Be a Sensitive Subject That People Don’t Like to Discuss. But He Also Knows How Important It Is to Know All There Is to Know About It. Taylor Makes It His Mission to Spread Awareness About Estate Planning, and We Believe Everyinvestor Is the Best Platform to Do That.

Monique - 300x300

Written by
Monique Pittman
Pensions Expert

Monique Is Our Resident Pensions Expert. Many People Postpone Planning Out Their Pension, Thinking That Is Something They’ll Have to Worry Much Later in Life. Monique Knows How Important It Is to Start Planning Your Pension Early, and She Wants You to Know It Too!

Written by
Lisa Schilling
Insurance Expert

Lisa Is Our Resident Insurance Expert. She Knows How Important It Is to Be Ready for Any Scenario, Especially When a Family Member Is Involved. Nobody Likes Being Found Unprepared in a Tough Situation! Lisa Can Find the Best Insurance to Cover Your Every Need, Present and Future.

Doyle Edwards - 300x300

Written by
Doyle Edwards
Mortgages Expert

Doyle Is Our Resident Mortgages Expert. He Comes From a Long Line of Financial Gurus, and It Truly Shows. Despite His Young Age, There Is No Question He Cannot Answer When It Comes to Mortgages, and His Ability to See Outside of the Box to Find the Best Mortgage Deals Is Truly Impressive.

jason stubbs 300x300 1.jpg

Written by
Jason Stubbs
Equity Release Expert

Jason Stubbs Is a Specialist in the Equity Release Sector. He Enjoys Helping Older People Who Are Struggling Financially Get Out From Under Financial Pressure.

rachel w.jpg

Rachel Wait
Personal Finance Journalist

Rachel is an experienced finance journalist and editor with a particular interest in personal finance and consumer affairs. She has vast experience writing about money issues, property, insurance, and consumer affairs, and you’ll find her articles regularly featured in top media and newspaper publications.

Reviewed by
Francis Hui
Senior Risk Manager

Having held various high-level roles across the industry, Francis is truly an expert in aiding UK citizens in their financial decisions and risk analysis. His unique insight and statistical knowledge make him the perfect person to help you take your financial future to the next level.
Mark Patterson

Written by
Mark Patterson
Mortgage Expert

Mark Patterson is a well-known expert in mortgages. He has been working as an expert for over 15 years, and he specializes in the UK mortgage market.
kath icon.png

Katherine Read
Consumer Affairs Writer

She writes on the topics of equity release, home reversion, and mortgages.

Nicola Date

Nicola Date
Writer & Journalist

Nicola is a financial writer for EveryInvestor and is passionate about the opportunities that equity release can open up for homeowners. Her extensive business experience and deep understanding of the industry means that she’s always up-to-date with the latest developments.