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

tesco

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.
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