A lot of people will be making the most of Tesco (LSE: TSCO) in the next week or two. Whether it is food for Christmas day or gifts for the family, the supermarket giant offers it all. But in coming to the end of one year and looking forward to the next, I can’t help but wonder what 2020 may have in store for Tesco shares.
Asian business
The most recent news worth looking at is that Tesco is considering selling its businesses in Malaysia and Thailand following “inbound interest” from an unnamed investor. This is perhaps a good-news, bad-news scenario. If sold it is likely to bring in a large lump sum of cash, but Tesco’s Asian business is a profitable unit so its loss could hit the bottom line in future.
Tesco’s Thai and Malay businesses collectively account for about 10% of the supermarket’s sales, and with an operating margin above 6% are some of the most profitable units (the UK and Irish arm have a margin of just half this). This would suggest that any offer would have to be very large to be tempting.
Having already sold its Japanese business in 2012, and having pulled back from the US in 2013, any sale here will continue the trend of consolidating its position after what some now say was overexpansion.
It also comes, of course, as online shopping continues to grow as the primary grocery shop for many people – taking the money from an Asian sale to use elsewhere may just be a good move.
Amazon Prime model…kind of
One of the first UK companies to offer a loyalty card scheme, Tesco relaunched its Clubcard reward system in November with a subscription-based option. Customers can now choose to pay £7.99 a month in return for a range of discounts across Tesco products, banking, and mobile phone services.
To some extent this mirrors Amazon’s Prime model, where a subscription effectively gets you better service and faster deliveries than the free option. This may bring in some money for Tesco, but I can’t help but suspect the average customer won’t really feel it is worth it. That said, if the subscription discounts include petrol and diesel, there certainly could be many drivers that find the £8 per month price tag good value.
The value of loyalty schemes for a company has always been questioned – there is a strong argument, I believe, to suggest you are simply giving away money to customers who were already going to shop with you.
Dividends
One last area to consider is dividends. The major thing that has always put me off Tesco as an investment is the poor returns it offers to investors – a current dividend yield of about 2.6%. For such a large, blue-chip company I think this is very poor (Sainsbury’s currently offers 4.9%).
That said, some analysts are now expecting the company to raise dividends in 2020 to somewhere near the 4.5% region. For me, this would certainly help make the investment case. I don’t see Tesco shares as set to be a major grower anytime soon, but I think the company’s prospects certainly look good enough to make it a stable investment.
