After starting with gains, shares in Tesco PLC (LON:TSCO) dropped back this afternoon as the City looked beyond the surprise dividend resumption and further into the supermarket giant’s first half results.
Around midday, the FTSE 100-listed firm’s shares were down 2.3%, or 4.3p at 185.75p, having initially hit a session peak of 194.42p in early trading.
READ: Tesco resumes dividends for first time since 2014/15 accounting scandal, after strong first half profit growth
Tesco announced it is to pay a 1p interim dividend – its first since 2014/15 – after the retailer reported a 27.3% jump in operating profit before one off items to £759mln, up from £596mln a year earlier and beating the consensus forecasts for around £700mln.
The profit boost came as the UK’s biggest retailer posted a seventh straight quarter of underlying sales growth, with group sales up 3.3% to £25,2bn and UK like-for-like sales growth of 2.2%.
Pedestrian UK Q2 growth worrying
But Mike van Dulken, head of research at Accendo Markets, commented: “A return of dividends has been long awaited as evidence of management faith in the turnaround and recovery.
“However, it does nothing to hide what is worryingly pedestrian UK Q2 growth of just 0.4% for transactions and 0.3% for volumes while like-for-like sales slow to 2.1% from what may now prove a brief 2.3% peak in Q1.”
Which Van Dulken added is concerning “when discounters like Aldi and Lidl continue to take market share monthly, openly competing on price (now 12.2% combined market share, +3.9pts since Jan 2015, vs TSCO’s 27.8%, -1.3pts since Jan 2015).”
The analyst concluded: “Lots of positives, granted, but work still to do.”
Margin pressures remain
Russ Mould, investment director at AJ Bell, also noted some concerns on competition, as shown by Tesco’s emphasis on minimal price increases.
He said: “It remains to be seen how much pressure Tesco is passing down the chain of suppliers in this environment (and the company makes no reference to the chicken supply investigation by two national media outlets, even though the 2013 horse meat scandal turned out to be one indication of margin and profit stress at the company).”
Mould also noted: “While net debt continues to rattle lower, falling to £3.3bn from £4.4bn a year ago (and £8.5bn when Dave Lewis took over as boss), the company still has lease obligations of £7.3bn and a £2.4bn pension deficit.”
Pensions a thorn in Tesco’s side
Also referring to the pension issues, Laith Khalaf, senior analyst, Hargreaves Lansdown noted: “The pension continues to be a thorn in the side for Tesco, though an additional £15mln of annual contributions is not as bad as it might have been.”
He said: “The company’s pension valuation has fallen at an inauspicious time, with low bond yields exacerbating the deficit. If the Bank of England follows through on its recent rhetoric and starts to raise interest rates, Tesco’s pension black hole could collapse, but Tesco won’t see any cash benefit for the next three years.”
Khalaf added: “Indeed, largely as a result of some whizzy changes to its financial assumptions, Tesco has seen a £3.1 billion improvement in its statutory pension deficit in the last six months, yet again this yields no cash benefit to the company.
“C’est la vie in the madcap world of valuing future pension liabilities.”