- Store group gaining market share
- Operating profit tops forecast
- Further £1 billion share buyback
The UK’s largest supermarket group, Tesco (TSCO), reported record operating profits for the year to February 2024 and announced a fresh share buyback as it continues to attract shoppers and inflation eases.
Shares in the Hertfordshire-based company gained 6p or 2% to 293p.
VALUE PROPOSITION DRIVES GROWTH
Group sales for the year to February excluding VAT and fuel were up 7.4% to £61.5 billion driven by like-for-like growth of 6.8% as food-price inflation fell over the course of the last 12 months.
Adjusted operating profit hit £2.83 billion, up 12.8% on the prior year and not just above its recently-raised target of £2.75 billion but above the previous high recorded in 2019 thanks to better margins and more than £600 million of cost savings.
Chief executive Ken Murphy said more customers were choosing to shop at Tesco in response to improvements in the value and quality of its products, as well as price cuts on more than 4,000 items driven by its Aldi Price Match and Clubcard propositions.
Retail free cash flow was £2.06 billion, in line with the firm’s raised guidance, while net debt was reduced by £729 million due to strong cash flow and a £250 million special dividend from Tesco Bank which is being hived off to NatWest (NWG).
As well as raising the full-year dividend by 11% to 12.1p per share, the firm revealed it would buy back another £1 billion worth of shares over the next 12 months taking the total amount of buybacks since it started its capital return programme in October 2021 to £2.8 billion.
EXPERT VIEWS
Clive Black, head of consumer research at Shore Capital, hailed the results as ‘another very good year of financial progress’ and described Tesco as ‘a high-quality cash compounder producing sound and sustainable trading profit progress, an attractive recurring annual income stream (4%+) and a now-repeating buyback, expanded to £1 billion in FY25 on the way to c15-20% de-equitisation’.
‘There is a lot to like on an FY25 PE (price to earnings) ratio of 10.9 times’, added Black, who reaffirmed his Buy rating on the stock.
Martin Maloney, senior analyst at KIllik & Co, argued the grocer’s shares were undervalued given the improvement in the underlying fundamentals of the business, Tesco's strong competitive positioning in online and convenience and Booker’s future growth prospects.
‘Consensus forecasts for earnings growth together with an increasing dividend and share buybacks imply a potential shareholder return in the low- to mid-teens annually over the medium term’, added Maloney.
