Tesco and Vodafone Yield 5%

STOCK UPDATE: Tesco has a new chief executive and Vodafone has done a deal with Portugal Telecom. Morningstar analysts review developments at these high yield stocks

Morningstar Equity Analysts 22 July, 2014 | 1:24PM

Tesco – Yielding 5.3%

On July 21, Tesco (TSCO) announced that current chief executive Philip Clarke will be replaced by Dave Lewis, currently the president of Unilever’s personal care business, on October 1, 2014, writes Morningstar analyst Ken Perkins. This announcement follows the May announcement that Laurie McIlwee, currently the finance director at Tesco, will also leave in October. Lewis will join the board as Clarke steps down, but Clarke is expected to support the transition through the end of January 2015.

The announcement isn’t a complete surprise, as Tesco has struggled to rise above elevated competition in the U.K. over the past several trading periods. In the July 21 press release, management cautioned that results have been weaker than originally expected in early June, when the company issued its first-quarter interim sales update. Although Tesco has been justified in speaking of its solid omnichannel presence, price investments, and store renovations, the firm’s competitive strengths and strategic initiatives have yet to drive Tesco’s like-for-like sales growth and profits higher, and investors’ patience has run thin.

Although we intend to incorporate new information into our outlook, we don’t expect a material change to our £3.80 fair value estimate or our no-moat rating for Tesco. We expect U.K. like-for-like sales growth to remain muted and profit margins down this year due to elevated competition. Overall, we believe Tesco's shares are undervalued, but given the structural headwinds Tesco faces and the coming management transition, we think Tesco is suited only for investors with a long investment horizon and a high degree of risk tolerance.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Tesco PLC213.10 GBX-0.88
Vodafone Group PLC126.90 GBX1.75

About Author

Morningstar Equity Analysts  Morningstar stock and fund analysts cover 2,000 mutual funds, 2,100 equities, and 300 exchange-traded funds.

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