Ignore the hubbub, Tesco can still be a major income play

Investment insider

So Tesco's crown as the UK's most successful retailer has
slipped. The past quarter brought the first fall in UK profits for
decades and headlines this week cried out that the once mighty
retail juggernaut has been stopped in its tracks.

But wait a minute, there is still a case for Tesco and the other "Big Four" supermarkets – Asda, Sainsbury's and Morrisons. The £160bn UK food retailing market is dominated by these four – which account for about three-quarters of the groceries we buy.

In comparison, the likes of Waitrose, together with Aldi and Lidl, account for less than 10 per cent of the market. For supermarkets, market share is vital. That is why Tesco's profit- slip has been greeted with such catcalls. But remember its share is still close to 30 per cent – that's an outstanding achievement over the long term.

The aim of all the players is to grow their market share in an otherwise slow-growth sector. This is understandable, as the grocery sector has grown only around 4 per cent a year since the turn of the millennium. Every little helps, as the advert says.

In terms of performance, supermarkets are by-and-large reliable. Over the past 12 years, the food and drug retail sector has delivered a total return of about 140 per cent, even though the shares have appreciated by only 65 per cent. The reason is that reinvested dividends helped to boost the total return.

In that sense, grocers should be seen primarily as income generators rather than fast-growing businesses. However, the simplistic income model was put to the test when Tesco embarked on an aggressive growth strategy in 2000 that almost doubled its share of the UK market over 10 years.

Even in its pursuit of growth, Tesco has been able to maintain its dividend track record – which now stands at 30 consecutive years of increased payouts.

What we have seen is that Tesco's aggressive growth strategy has come to a standstill, if not been sent a touch into reverse. But who is to say that this retail giant won't come again soon. As for the other members of the Big Four, Tesco's loss is undoubtedly going to prove their gain.

All in all, despite the negative headlines and the unprecedented fall in profits income-hungry investors write off the likes of Tesco and the other supermarkets at their peril.

David Kuo is director of the financial advice site fool.co.uk

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Suggested Topics
PROMOTED VIDEO
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Web Developer - PHP

    £16500 - £16640 per annum: Recruitment Genius: This fast growing Finance compa...

    Ashdown Group: Client Services Manager - Relationship Management - London

    £30000 - £32000 per annum + benefits : Ashdown Group: A highly successful, int...

    Recruitment Genius: Credit Controller / Customer Service

    £18000 - £20000 per annum: Recruitment Genius: This rapidly expanding business...

    Guru Careers: In-House / Internal Recruiter

    £25 - 28k + Bonus: Guru Careers: An In-house / Internal Recruiter is needed to...

    Day In a Page

    Woman who was sent to three Nazi death camps describes how she escaped the gas chamber

    Auschwitz liberation 70th anniversary

    Woman sent to three Nazi death camps describes surviving gas chamber
    DSK, Dodo the Pimp, and the Carlton Hotel

    The inside track on France's trial of the year

    Dominique Strauss-Kahn, Dodo the Pimp, and the Carlton Hotel:
    As provocative now as they ever were

    Sarah Kane season

    Why her plays are as provocative now as when they were written
    Murder of Japanese hostage has grim echoes of a killing in Iraq 11 years ago

    Murder of Japanese hostage has grim echoes of another killing

    Japanese mood was against what was seen as irresponsible trips to a vicious war zone
    Syria crisis: Celebrities call on David Cameron to take more refugees as one young mother tells of torture by Assad regime

    Celebrities call on David Cameron to take more Syrian refugees

    One young mother tells of torture by Assad regime
    The enemy within: People who hear voices in their heads are being encouraged to talk back – with promising results

    The enemy within

    People who hear voices in their heads are being encouraged to talk back
    'In Auschwitz you got used to anything'

    'In Auschwitz you got used to anything'

    Survivors of the Nazi concentration camp remember its horror, 70 years on
    Autumn/winter menswear 2015: The uniforms that make up modern life come to the fore

    Autumn/winter menswear 2015

    The uniforms that make up modern life come to the fore
    'I'm gay, and plan to fight military homophobia'

    'I'm gay, and plan to fight military homophobia'

    Army general planning to come out
    Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

    What the six wise men told Tony Blair

    Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
    25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

    25 years of The Independent on Sunday

    The stories, the writers and the changes over the last quarter of a century
    Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

    Homeless Veterans appeal

    As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
    Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

    Smash hit go under the hammer

    It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
    Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

    The geeks who rocked the world

    A new documentary looks back at origins of the computer-games industry
    Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

    Belle & Sebastian is taking a new direction

    Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea