Posted: May 23rd, 2022
2018 2019 2020 2021
Price 208.6 231.9 220.1 222.2
EPS 0.56 0.51 0.38 1.91
Price earnings ratio 372 451 582 116
Net income 1210 1320 973 6147
Outstanding shares 2156 2568 2575 3219
EPS or Earning per share 0.56 0.51 0.38 1.91
DPS 5.77 9.15 9.15 10.9
EPS 0.56 0.51 0.38 1.91
Dividend payout ratio 10.28 17.80 24.22 5.71
Net income 1210 1320 973 6147
Dividend declared 12440 23497 23561 35087
Dividend coverage ratio 10% 6% 4% 18%
Price earnings ratio: The price earnings ratio reflects the valuation of the company and indicates whether the share of the company is overvalued or undervalued in the market. If the company’s PE ratio is more than the same of industry, it can be said that company stocks are overvalued in the market.
EPS or earning per share: It is another important ratio which reflects earning that comes on each unit of equity and more is the EPS it means more earning one observed on each unit of equity.
Dividend payout ratio: Dividend payout ratio reflects the portion of earning distributed among the shareholders as a dividend. Dividend payout ratio may be more than 100% which reflect that firm is giving more dividends to shareholders to satisfy them.
Dividend coverage ratio: Dividend coverage ratio is the important ratio which reflects number of times dividend is covered by the net profit earned by the business firm.
Interpretation of ratios
Figure 1Price earnings ratio of Tesco
From the chart given above it can be observed that PE ratio of the Tesco is increasing constantly and in the year 2018 it was 372 which rose to 451 in the year 2019 and in the year 2020 it become 582 which reduced to 116 in the year 2021. This sudden decline in the PE ratio is the matter of investigation for the business firm.
Figure 2Earning per share of the firm
EPS or earning per share in the year 2018 was 0.56 which become 0.51 in the year 2019 and it declined to 0.38 in the year 2020. However, further in the year 2021 it increased to 1.91. Hence, it can be said that sharp increase happened in the firm earning per share and it can be said that it is good from the investors point of view.
Figure 3Dividend payout ratio of Tesco
Dividend payout ratio of the firm was 10.28 in the year 2018 and it increase to 17.80 in the year 2019 and further it increased to 24.22 in the year 2020. However, in the year 2021 it declined to 5.71. It can be said that this is alarming signal for the investors as percentage decline suddenly.
Figure 4Dividend coverage ratio
The firm’s dividend coverage ratio in the year 2018 was 0.10 which declined to 0.06 in the year 2019 and further it declined to 0.04 in the year 2020. However, it sudden increase to 0.18 in the year 2021. Thus, it can be said that some factors or company strategy have a very high influence on the company dividend coverage ratio.
Financial and non financial factors
Tesco stocks are overvalued in the market as in the last five years retail sector of UK PE ratio remain 17 to 25 and from the chart given above it can be observed that each year Tesco PE ratio is higher than 100. Means that firm stocks are overvalued and non financial factor behind this is that people anticipate strong growth of the company in the retail sector and due to this reason over investment made in the company equity. Stable in earning is another reason behind high PE ratio. Due to all these reason ultimately Tesco stocks get overvalued. Earnings per share of the Tesco declined constantly and in the year 2021 it increased. This happened because Tesco’s net profit either slightly increased or decreased, but in the year 2021 it increased sharply due to which EPS got increased. Tesco made many changes in its stores and technology base, which pushed its business profit and led to a sharp increase in the business profit.
Dividend payout ratio of the Tesco increase constantly year over year but in the year 2021 it declined suddenly. This higher dividend payout ratio more than 1 is reflecting that Tesco by using its internal resources is paying dividend to the shareholders. On other hand, higher is the value of dividend paid to the shareholders they will make more investment in the company as they will assume that company fundamentals are strong. These years firm did not earn very high amount of business profit but by just paying more dividend to shareholders it is trying to maintain confidence among the investors. Hence, it can be said that on this front, firm considering trust factor give more dividend to the shareholders then it must actually give to them. Dividend coverage ratio of the firm is declining constantly and this reflect that firm financial condition is not so good and due to this reason its net profit is not able to cover dividend even single times. It can be said that Tesco have less control on its direct and indirect expenses and this lead to low business profit which lead to low dividend coverage ratio. In the adverse market conditions Tesco want to maintain its good image so that more funds can be raised from the investors and due to this reason it is paying more dividend to the investors. More fund will be raised firm will be able to improve its business at fast pace and it will speed up technology development which will give it competitive edge in the market. This non financial factor motivate firm to pay dividend to the investors by using its internal resources.
2018 2019 2020 2021
Price 253 231.8 211.1 229.7
EPS -0.04 0.16 0.02 -0.04
Price earnings ratio -6696 1473 10795 -5418
Net income 738 1331 152 -280
Outstanding shares 7411 8456 7773 6604
EPS or Earning per share -0.04 0.16 0.02 -0.04
DPS 0.102 0.112 0.105 0.106
EPS -0.04 0.16 0.02 -0.04
Dividend payout ratio -2.70 0.71 5.37 -2.50
Net income -280 1331 152 -280
Dividend declared 756 947 816 700
Dividend coverage ratio -0.37 1.41 0.19 -0.40
Figure 5PE ratio comparison
Price earnings ratio: From the ratio of the Sainsbury given above it can be observed that it is both positive and negative and values are highly positive and highly negative then retail industry PE average. This reflect that firm stocks are highly overvalued in the market and at the current market price if investor is making purchase of the stock of the Sainsbury then it means that it is paying more than reasonable amount for the stock of the Sainsbury. On comparison of the both firms PE ratio it can be said that both firms stocks are overvalued in the market and investment must not be made on these firms shares. On comparison it can be said that Sainsbury stocks are more overvalued then same of the Tesco. Hence, investor if want to choose from the both firms stocks then it must go for the Tesco shares. Investor if want to make rational investment decision then in that case it must wait for the both firms share price decline to get better return. Higher PE ratio reflect that firm is earning less but still investors maintain confidence on it and regularly make investment in it which lead to higher PE ratio in the business.
Figure 6EPS comparison
EPS or earning per share: EPS of the Sainsbury is fluctuating constantly and in the year 2018 and 2021 it is negative but in the year 2019 and 2020 it is positive. From the chart it can be observed that EPS is very low for the Sainsbury. This ratio reflects that Sainsbury is not able to generate good return for the investors. On this front, Tesco is really doing well and its EPS is positive across the years and its earnings per share are higher than same of the Sainsbury. It can be said that on all fronts Tesco is much ahead of Sainsbury. After corona pandemic loose down in 2021 Tesco observe fast growth in its profit which push its EPS to higher level in the year 2021. On other hand, Sainsbury failed to come out of pressure and in 2021 it further observe negative EPS. This comparison reflects that somewhat Tesco adopt perfect strategy in its business which less to sharp EPS. One of the reasons behind higher EPS is that Tesco improve its home delivery service and increase its capacity to serve people in terms of home delivery service. This factor restores people confidence on Tesco and they make more purchase from the Tesco which lead to higher EPS for the firm. On other hand, in case of Sainsbury customers were having lot of grievance due to which it lost its ground in the market. It can be said that Tesco perform better then Sainsbury on this front.
Figure 7Dividend payout ratio of Tesco and Sainsbury
Dividend payout ratio: Dividend payout ratio of the Sainsbury is negative in the year 2018 and 2021 but in the year 2019 and 2020 ratio value is positive. It can be observed that ratio value increase at fast pace in the year 2020 but in the year 2021 it become negative. In case of the Tesco from 2018 to 2020 this ratio value increased constantly and in the year 2021 heavy decline comes in ratio value. It can be said that performance of Tesco is better than Sainsbury but latter one follow more systematic approach in the business then former one in terms of dividend payment as Sainsbury did not exploit its internal resources to keep investors satisfied. However, in the year 2020 Sainsbury use its internal resource to pay dividend to the shareholders. Overall, it can be said that Tesco is more working on giving better returns to the investors and it successfully maintain trust of the investors in its business whereas same not happened in case of the Sainsbury. However, in the year 2021 Tesco follow more balanced approach and it less use internal resources to pay dividend to the shareholders. It can be said that on this front also Tesco is performing better then Sainsbury.
Figure 8Dividend coverage ratio of firms
From the chart given above it can be observed that in case of the Sainsbury dividend coverage ratio is negative for the year 2018 and 2021. In the year 2019 suddenly dividend coverage ratio get increased and in the year 2020 also it get increased but at very slow pace. This reflects that other then 2019 in no year firm was able to pay entire dividend amount by using its net profit amount and in most years it use its internal resources to make dividend payment to the shareholders. On this front there is not much difference between both firms statistics and both almost give similar performance and it can be said that in case of both firms net profit amount is not able to cover dividend amount. Both firms need to work on this front and they must try to pay as much as dividend out of profit not from the other internal resources. Internal funds can be used for another purpose in the business.
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