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How Buffett’s Tesco May Be Valued in 5 Years

July 22, 2011 | About:
It is no secret that I like Tesco, having written about the company a number of times on these pages. Recently I updated my dividend log book and my mind wandered into the realms of Tesco’s future dividend cash stream as well as a valuation based on the simple book value method.

Dividend stocks provide the investor with cash to reinvest if either the dividends received are large enough or if the stocks, and accompanying cash flow received, are held long enough. Of course taxation must be figured into the equation.

I wrote about the Washington Post dividends that Warren Buffett receives here.

As can be seen from that same article Tesco’s dividend yield increases has been exemplary.

For the current year the dividend is expected to come in at 15.62p which equates to a yield of 4.01% on my Tesco top up price which occurred yesterday at a price of 389.4p.

The linked article above shows that, on average, Tesco increased their dividend by 11.29% per annum. However, I think that such rates are not sustainable unless the international division is somewhat larger than it is currently.

Working forward with an estimated annual dividend increase of 9% — a more realistic figure I think — we can calculate the approximate dividend in five years time:

Year End ( February )

Dividend ( Pence )











Tesco’s five-year historic dividend yield equals 3.04% therefore we could estimate that in five years time the Tesco share price will be around 790p or roughly double from where it is now: (24.03/3.04) X 100

Tesco is a member of the S&P Euro 350 Dividend Aristocrat list, having increased its dividend annually over the last 26 years, and will try to avoid too cut the dividend at all costs as this would reflect very badly on the company.

Similarly we can look at book value. Over the last five years the share price has gone exactly nowhere although admittedly the fall in early 2009 provided a lovely long term purchase opportunity. The stock trades at the same level now as it did at the end of 2006.

Buffett bought Tesco stock throughout 2006 and finished buying, as far as I can make out from newspaper articles, at just under 400p.

Book value then came in at GBP 10.57bn on 8.04bn diluted shares. Currently book value equals GBP 16.62bn on 8.06bn diluted shares.

Suppose that book value continues to grow at that rate. In five years book value will increase by 70% to GBP 28bn so given that the market capitalization historically is around 2.35 times book value we can calculate a market capitalization, five years hence of around GBP 65.8bn.

Like the dividend outcome this figure is roughly double of Tesco’s current valuation.

These types of calculations are not precise but then no calculation is when you are looking five years out.

Disclosure: Long Tesco and looking to add over the next 72 hours if the price is right.

Rating: 3.1/5 (7 votes)


Patsyluck premium member - 2 years ago
Sorry to be harsh but investing ones money is a serious business

"therefore we could estimate that in five years time the Tesco share price will be around 790p or roughly double from where it is now"

please go to other investment go-go sites with this type of inane statement.....with no analysis to back it up

the quality on this site is being dragged down by the increased number of pseudo-gurus plugging their favorite holdings with flimsy or no analysis
Liarspoker - 2 years ago

Patsyluck - sorry that you didn't enjoy the article. I agree that making money is a serious business.

However the line "therefore we could estimate that in five years time the Tesco share price will be around 790p or roughly double from where it is now" is based upon two valuation techniques ( dividend and book value ) which both show that such a price target is reachable.

Currently analyst target prices range from 385 ( Citigroup ) to 500p - these, of course, are short term targets.

What do you think happens to the share price, which has remained static, of a quality company trading on historic low multiples whilst book value has increased by over 50% in the last 4 years and will likely increase in the future. Surely the share price will rise ?

An alternative valuation based on earnings may be calculated on 9% EPS growth giving us EPS 55p in 5 years. Multiply the EPS by the historic average P/E ratio of 14 and the price becomes 770p which is also near double the current price.

Perhaps it is a little early to invest in Tesco as Euro zone worries may affect earnings ( countries leaving the Euro then devaluing their own currency ) but then again uncertainty is the investors best friend.

Also I am not a pseudo-guru nor am I a guru of any kind. However my picks on my website has shown that I can achieve good returns with the portfolio being up nearly 50% in just over a year. These trades/picks are forwarded to subscribers half monthly so that there is no hindsight involved in creating the portfolio.

Finally I admit that Tesco is a favourite share of mine although that is no secret.

I look forward to reading your articles in the future.

Patsyluck premium member - 2 years ago

Congrats on your portfolio mean feat.

I have no beef with your valuation techniques but I my point is that you have jumped forward to a +50%

increase in earnings in 5 years without explaining to the reader how the business will reach that or offering

an analysis/discussion of the main growth/profit engines in the company:

- mature home market with ROCE just under 20%, can they grow this and hold on to high ROCE

- international business (low ROCE, can they improve this..regional buying synergies,new format stores etc)

- Bank (high tier 1 ratio and strong profit potential)

Growing ROCE will come through improving sales densities, getting a lower build cost per square foot and improving profit margins.

BTW I don´t hold an opinion on the share other than if Buffett is buying, that says a lot.However I believe retail

is a tough business and nothing is a given but Tesco is the top big box retailer in Europe

Also you may be interested in a positive report in todays Barrons on the company.

Liarspoker - 2 years ago

Thanks for your reply Patsyluck - I see where you are coming from now.

To write such an article would take considerable more time than I have presently got therefore my last few Tesco articles have been fairly short. I am, however, working on a much longer article which looks in depth into all aspects of the business. Like I said this takes a considerable amount of time so the article will not be ready for a while.

In short I would be happy if Tesco simply maintained their +-30% UK market share on current costs. Current ROCE is just under 13% and the company is aiming to increase that figure to 14%. The international business has low ROCE until the newer markets become more established. Tesco have received permission to move into India which should be a good move. The bank has indded got good profit potential but simple rules apply: Buy money cheaply, sell it expensively and be prudent in lending. As we all know those rules are not always followed. The demand for bonds issued to fund the banking arm suggests the market thinks that a move into financials is a good thing ( I am not so sure ). Roce will only improve by around 1% but it's expansion into the international market that will fund growth. The retail model is alive and well at Tesco ( ie establish stores, sell them and use that money to expand further ) and I agree that retail is not the most attractive sector though at this stage Tesco is looking a little like a conglomerate.

Thanks for the heads up about the Barron report.

Kind Regards,

Balajisridharan - 2 years ago

What are you thoughts on Bronte Capital's comments and post on TESCO? _

Personally, I am doing some scuttlebutt research on this. Most of the people I know who have lived in the UK, by and large, have been happy with the stores (though the information is dated and confined to a specific region).

Have you had any personal experiences? Any other Gurufocus readers with opinions / experiences in TESCO?

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