Tesco: The Decline of

It’s been a long standing bug bear of mine regarding share ownership in companies.  Small ordinary shareholders have little influence in a company, and, are basically just along for the ride at the mercy of the management.  If management make a wrong turn in the strategy then effectively the share price can come crashing down, and, for the small shareholder all is lost, which could be returns that have been built up over a number of years.  I have been pondering if it’s possible to actually have an inkling that things may be about to take a down turn for a company from an analysis of the accounts.  I’ve decided to use Tesco as an example to try and analyse if any predictions could have been made before the company hit its recent troubles.  I do not hold out much hope however, because if Warren Buffet can make such a mistake, then what hope is there for any of us?  To start with I have analysed the following data for Tesco over the past nine years.

	2014	2013	2012	2011	2010	2009	2008	2007	2006	2005
Share Price - Low	168.75	319.05	297.05	356.25	377.50	306.20	285.90	396.25	309.00	294.75
Share Price - High	335.75	387.75	411.25	436.65	454.40	435.65	477.25	492.00	409.75	410.00
Share Price - Average	275.52	361.24	325.30	396.28	419.91	369.06	381.80	444.34	352.18	316.01
Earnings per share	12.07	1.54	34.98	33.10	29.33	27.50	26.95	23.84	20.07	17.44
Change in EPS	683.77%	-95.60%	5.68%	12.85%	6.65%	2.04%	13.05%	18.78%	15.08%
Dividend per share	14.76	14.76	14.72	13.53	12.28	11.27	10.03	8.91	7.80	7.06
Increase in Dividend	0.00%	0.27%	8.80%	10.18%	8.96%	12.36%	12.57%	14.23%	10.48%
Dividend yield (Av. Price)	5.36%	4.09%	4.53%	3.41%	2.92%	3.05%	2.63%	2.01%	2.21%	2.23%
Dividend Cover	0.8	0.1	2.4	2.4	2.4	2.4	2.7	2.7	2.6	2.5

From the data above it can be seen that since how the share price has been totally destroyed over the past nine years.  Taking the average share price over the years to the low in 2014, investors have lost at least 50% of their investment.  At the extremes in 2007 you will have lost over 62%.  It is interesting to note that if you bought a £1,000 worth of shares at the average price in 2007, and, you sold at the low in 2014, your return including dividends would be £585.22.  Is a 41.5% loss on your capital really what you originally invested in Tesco for?

From 2005 up until 2013, the earnings per share have been growing at a positive rate, a fact that would have pleased every investor.  The dividend as well has double in the same period, although earnings per share have not.  Perhaps the Directors were trying to squeeze as much as they could out of the company for the sizeable shareholdings they owned?  Having said that the dividend cover until 2013 was a respectable 2.4 times; however, as we shall see later, may be a more prudent course of action would have been a smaller dividend, and, a reduction in the value of the debt.