Tesco (TSCO) has announced both revenue and profits rose in the first half of its financial year, prompting the UK's largest grocer to declare its first dividend in three years. Shares rose 2% in mid-morning trading on the news but have subsequently fallen.
Revenue for the half year, which ended August 26, rose to £28.4 billion from £27.3 billion, whilst pretax profit multiplied to £562 million from £71 million. The increase in profit is largely due to a £235 million fine recorded in the comparison period last year resulting from the company's accounting scandal.
Tesco said it decided to restore the dividend, "reflecting the improved performance in the business". The interim dividend was set at 1p per share, and Tesco said it anticipates a broadly one-third, two-third split between the interim and final dividends, implying a 2p final dividend and 3p for the full year.
This is in line with Morningstar equity analysts’ expectations. Philip Gorham earlier this year forecast a reinstatement of the dividend for the trading year to February 2018 of 2p per share.
“Tesco is once again generating free cash flow, albeit at a modest rate similar to peers,” he wrote. “Tesco has been repositioning its business in recent years, including withdrawing from a number of less profitable or unpromising markets, which has generated sales proceeds to pay down debt.”
Group sales, which exclude fuel, rose 3.3% to £25.2 billion from £24.4 billion the same period the year before, rising 0.7% at constant currency rates.
The company's net debt has been reduced by £469.0 million since February, and it now stands at £3.3 billion from £4.4 billion the year before.
Global Sales and Profits Rise
Operating profit in Asia climbed by 25% at constant currency and 40% at actual rates to £141 million from £101 million, with the same in the UK & Ireland rising to £471 million from £389 million, and in central Europe rising to £61.0 million from £17 million.
Though profit grew in Asian operations, overall sales fell 6% at constant exchange rates and like-for-like sales fell 8.3% in the region. Tesco said this reflects a decision to withdraw from bulk selling in Thailand at the start of the financial year.
Like-for-like sales in the UK and Ireland grew 2.1%, the seventh consecutive quarter of positive performance, with operating profit in the region up 24% at constant rates and 27% at actual rates, growing to £471 million.
In central Europe, like-for-like sales grew by 0.1%, though overall sales reduced by 0.9% at constant currency due to store closures. The second quarter of the half saw an increase in like-for-like sales as the benefits of harmonising its trade plan began to appear.
Regarding its proposed £3.7 billion merger with Booker Group PLC, Tesco said this has now entered phase two of a review by UK regulator the Competition & Markets Authority.
Tesco said it is confident the merger will go ahead, with the CMA due to give an interim update on its review at the end of October, and it still expects the deal to complete in the first quarter of the next financial year.
Market conditions for the company have been "challenging", Tesco said, with inflationary pressure being felt in the first half but it said work has been done with suppliers to minimise price increases for customers. Tesco said its overall price inflation was around 1% below that of its competitors.
Morningstar equity analysts consider the stock to be overvalued at £1.90 and do not think the firm has a significant competitive advantage over its peers.
