The Tesco (LSE: TSCO) share price declined slightly last week after its investors approved a special dividend from the business. The stock has since recovered from its modest decline of around 1%.
The company has also completed a consolidation of its shares. This had to take place as, without it, the stock would have dropped significantly following the dividend payout. The 50.93p per share dividend is equal to around 21% of Tesco’s market capitalisation. On that basis, without the consolidation, the Tesco share price may have fallen by a similar amount.
The 15-for-19 consolidation of Tesco’s shares was designed so that, as far as possible, the company can maintain its current share price.
The cash return marks the end of an era for the retailer. Tesco completed the $10.6bn sale of its businesses in Thailand and Malaysia to the CP Group in December. As well as returning $6.9bn or £5bn to investors, the company also used £2.5bn of the disposal proceeds to bolster its pension fund.
Outlook for the Tesco share price
After these transactions, the retailer is now a leaner, more focused enterprise with a stronger balance sheet. I think this bodes well for the Tesco share price in future because the business can focus on doing what it does best. That is, serving customers well while earning profits for investors.
That said, due to the nature of the grocery business, I think it’s improbable this company will become the market’s next growth champion. Grocery retailing is a slow and steady industry, and the market tends to grow in line with inflation over the long term.
Still, what it lacks in growth, it more than makes up for in defensiveness. Consumers will always need to eat and drink, and there’s usually a Tesco nearby that can meet these demands.
Risks ahead
Unfortunately, even though it is the largest supermarket retailer in the country, Tesco does face plenty of challenges. The UK grocery market is highly competitive. So there’s no guarantee the business will continue to grow. Competitors may eat the company’s lunch.
This isn’t the only risk the group faces. The business is highly dependent on its employees. It’s one of the largest employers in the country. Therefore, an increase in the company’s wage bill could significantly impact the bottom line.
There has also been speculation of a potential excess profits tax, levied on companies that have prospered in the pandemic. Tesco could be in the firing line.
A large one-off tax on the group would certainly have a negative impact on the Tesco share price, in my opinion.
Overall, I think the retailer could be a great addition to my portfolio as a slow and steady defensive investment. When owned alongside a portfolio of other growth and income shares, I think the benefits of owning the stock could more than offset the risks associated with it.
However, that is just based on my own personal level of risk tolerance. It may not be suitable for all investors.
