UGB363: Strategic Corporate Finance Analysis of Tesco PLC

This assignment provides a comprehensive financial analysis of Tesco PLC, examining its strategic corporate finance decisions. Part A focuses on the company's overview, financing strategy (including ratio analysis like gross and operating profit margins, and beta), and investment strategy, including dividend policy. Part B and Part C analyze the impact of dividend policy on share prices and its importance in financial decisions. The analysis incorporates various financial ratios, market data, and academic research to evaluate Tesco's performance and strategic choices. The project also discusses the importance of dividend decisions and their impact on shareholder value, referencing different models and factors affecting dividend policies.

Strategic corporate finance

Table of Contents
Part A...............................................................................................................................................3
Introduction..................................................................................................................................3
Financing strategy........................................................................................................................3
Gross Profit Margin.................................................................................................................3
Operating Profit Margin..........................................................................................................4
Beta..............................................................................................................................................4
Investment strategy......................................................................................................................4
Dividend Policy...........................................................................................................................5
Conclusion...................................................................................................................................5
Part B...............................................................................................................................................6
Part C...............................................................................................................................................8
References......................................................................................................................................11

Part A
Introduction
Tesco PLC, founded in 1919 and based in Welwyn Garden City, the United Kingdom,
operates as a Grocery retailer with its subsidiaries altogether (Bloomberg, 2018). The company
provides with insurance and retail banking services as well (TESCO PLC, 2018a). It currently
operates in the United Kingdom, the Czech Republic, Hungary, Ireland, Poland, Malaysia,
Slovakia, India, Thailand and many more internationally. Customers are served by the company
through 6,809 stores and online as well. It currently has 440,658 employees (Reuters, 2018).
As of July 16 2018, Jason Tarry has been appointed as the new CEO of the company
(TESCO PLC, 2018b). In 2018, Tesco completed merging with wholesaler Booker Group
(TESCO PLC, 2018c). UK’s leading food business is created by these two companies who
brought together wholesale and retail expertise.
Financing strategy
Ratio analysis is a tool that has been developed for analyzing the numbers found in the
financial statements of organizations (Fraser, Ormiston & Fraser, 2010). Ratios are required for
linking the three types of financial statements.
The profitability ratios are widely used across organizations. They help in determining a
firm’s capabilities of earning sufficient returns.
Gross Profit Margin
The GP margin is calculated by dividing the Gross income by the net revenue (Lan,
2012). It determines the cost of products and pricing decisions of a firm. The firm’s figures

suggest that it has maintained consistency in competing with their relative competitors in the
market.
Operating Profit Margin
The OP margin is calculated by dividing the operating profit by the net revenue (Delen,
Kuzey & Uyar, 2013). It determines the relationship between the overall costs incurred and the
generated sales of a firm. The statistics of the company indicate that Tesco PLC has maintained a
stable and static operating profit ratio over the last 5 years which means their management
decided costs and sales are in good relationship with each other.
Beta
The beta value is basically the degree of sensitivity of the excess returns of asset that is
expected the excess returns of the market which is expected. The beta value of the Tesco PLC
stands to be 0.67 as of 2019 (GuruFocus, 2019). The beta value of the competitor of the
company, Ryan air stands to be 1.14 as of 2019.
Investment strategy
The largest retailer of the United Kingdom, the Tesco PLC went for expansion into the
foreign and cross border markets in an attempt of increasing growth in the future in the retail
Industry of the world. The global expansion strategy of the organization was initiated by
venturing into Asia, the United States and Central European regions. The statistics present in the
financial statements of the company implies that the profits of the company generated out of
sales were quite reasonable. On comparison of the growth of the company within the United
Kingdom against the Asian region, in the last five financial years, the company has been able to
generate only a 50% of its sales within the UK whereas Asian markets increased by 250%.

Heavy emphasis has been put on the international venture and investment of the company in the
global market.
Dividend Policy
The cash dividends of the Tesco PLC are paid as final year and interim dividend. The
dividend of the company is increasing steadily and has been inclining since years even during the
periods of recession. The annual dividend per share have increased by more than 85% which
were 3p for the year 2017 and have increased to 5.8p for the financial year 2018. For the
financial year 2015 and 2016, Tesco PLC did not pay any annual dividend to its shareholders
because the company went through various losses. The organization was very well known for its
high annual dividend which it had maintained from the year 2010 to 2013 which gradually
dropped down in the financial year 2014 due to heavy loss. Low yields and profits can result in
possible patterns of high levels of growth however, high yields and sudden profits sharp falls,
downturns and heavy losses. Low dividend yield and steady payments of dividend aims at higher
earners and those individuals who look forward at long term investments. The capital of the
business is expected to be invested upon projects which have a positive net present value because
the investors and shareholders always expect capital gains. This is in favor of the organization,
the Tesco PLC, because one of the reasons for the low dividend and yield is because of the huge
investments in the expansion of the organization for making it more diverse.
Conclusion
Tesco PLC is overall a well developed and a stable company. As according to the above
financial analysis, it can be concluded that the financial performance of the company has been
consistent over the past years and the company is financially strong. Their inventories are turned

over quickly and the payments from their customers are received at the earliest and the same
money is re-invested in the business. The company has a good ratio between their assets and
liabilities and have the ability to pay off their debts, both short term and long term. Their profit
margins are huge and consistent giving them a greater advantage in the market against their
competitors.
Part C
(a).
a) When the company decides not to change its current dividend policy, the price of the share is
5.658434783.
b) When the company decides to change its dividend policy as proposed by the Managing
Director and announces the change to the market, the share price is 12.71351351
(b).
As opined by Sulaiman & Migiro (2015), Dividend decision is one of the basic decisions
which a manager might take to support the finance of the company. Ball, Gerakos, Linnainmaa
& Nikolaev (2019), the retained earnings are useful in a way that they can be helped to pay off
the creditors, preference shareholders and finally the surplus as dividend. The Financial manager
can be concerned about investing the profits and the amount of the dividend to be paid. Every
decision taken is more or less inter-related and may impact on the future decisions of the
company. If a company pays dividend it may affect its cash flow but it will earn goodwill among
the investors. On the contrary, if the company retains its profits and does not distribute them as
dividends, it might accumulate the profits for future investments.

As suggested by Kajola, Adewumi & Oworu (2015), Dividend decisions are significant
to the valuation of a company which is translated into share prices' capital gain. The wealth
maximization of a shareholder is a supremely important objective for a financial manager. This
objective serves as an outlay of return on investment which is reflected in the potential value of
the organization or company. The returns include two types of components which are capital
gains (also known as bullish stock) and dividends. In spite of the inverse relationship present
between earnings and dividend ratio, retained earnings and dividend have the same purpose to
with the maximization of the interest of shareholders. While dividend helps in enhancing the
stakeholders' bargaining power, the retained earnings or the unshared profit are used for
financing various viable projects. However, the financial managers often work hard for
increasing the basic fundamentals of their organizations. According to various fundamentalists,
the fundamentals of organizations basically are earnings per share, earnings, dividend, dividend
payout ratio, and dividend yield. The movement of share prices within the stock markets reflect
upon the good fundamentals of organizations which further translate into the wealth
maximization of the shareholders.
Dividend is that proportion of the profits earned by an organization, which after the
deduction of taxes a distributed to the shareholders on the basis of pro-rata allotment. The
payment of dividend are impacted by various factors like taxation, investment decisions,
liquidity and government policy. According to Kaźmierska-Jóźwiak (2015), Dividend policy is
considered to be quite relevant in the determination of the value of an organization. In order to
understand the importance of dividend policy in financial decisions, it is necessary to examine
the impact of dividend policy on shares of a company. This is an important observation because
the prime objective of every listed company is to maximize its share value. Every organization

has a different process of utilizing their dividend. Any decision taken for one company might be
good for it but fatal to any other company. Ideally, a company must think of earning more before
distributing it to the people in interest. It depends upon the amount the company is ready to share
with the shareholders. If it is a small firm, the amount of dividends will be less and the customer
profile will also be different. However, if it is a big organization, it may distribute higher
dividends to its shareholders and their customer profile will also be different. The dividend per
share has an inverse relationship with the stock market's share prices. Various predominant
features and aspects have been noticed in the earnings per share related to the enhancement of
organizational value. There exists both a significant and positive relationship between the prices
of the stock market and the earnings per share while the relationship between internal rate of
return and movement of stock prices within the stock markets is both in significant and inverse.
Consistency within the payment of dividend cannot be overemphasized upon by shareholders
and investors as an important factor for the determination of the organizational value.
However, in the opinion of Kumar & Waheed (2015), a company can take alternate
dividend decisions such as not allowing the distribution of dividends in cash. Companies have an
option of selecting Stock Dividends for recourse to non-cash options. This can be a feasible
option to manage the expectations of the shareholders as well as balance the shortage of cash.
But if the company has an option of distributing cash dividends, it can. Keeping the option of
Stock Dividends shall be kept for exceptional circumstances. Therefore, it can be concluded that
it is important for companies to distribute their profits and retain the balance. Dividend Decision
is more of a trade-off between issue of new shares and retained earnings of a company. The
Dividend Decision model helps a company to make better and profitable profit distribution
decision.

References
Ball, R., Gerakos, J. J., Linnainmaa, J. T., & Nikolaev, V. V. (2019). Earnings, retained earnings,
and book-to-market in the cross section of expected returns. Journal of Financial
Economics (JFE), Forthcoming.
Bloomberg,2018. Company Overview of Tesco PLC. Retrieved from:
https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=413744
Delen, D., Kuzey, C., & Uyar, A. (2013). Measuring firm performance using financial ratios: A
decision tree approach. Expert Systems with Applications, 40(10), 3970-3983.
Fraser, L. M., Ormiston, A., & Fraser, L. M. (2010). Understanding financial statements. New
York, USA: Pearson.
GuruFocus. (2019). Tesco PLC (OTCPK:TSCDY). Retrieved from:
https://www.gurufocus.com/term/wacc/TSCDY/WACC/Tesco+PLC
Kajola, S. O., Adewumi, A. A., & Oworu, O. O. (2015). Dividend pay-out policy and firm
financial performance: Evidence from Nigerian listed non-financial firms. International
Journal of Economics, Commerce and Management, 3(4), 1-12.
Kaźmierska-Jóźwiak, B. (2015). Determinants of dividend policy: Evidence from Polish listed
companies. Procedia economics and finance, 23, 473-477.
Kumar, B. R., & Waheed, K. A. (2015). Determinants of dividend policy: Evidence from GCC
market. Accounting and Finance Research, 4(1), 17-29.

Lan, J. (2012). 16 Financial Ratios for Analyzing a Company’s Strengths and Weaknesses.
American Association of Individual Investors. Retrieved from:
http://www.aaii.com/journal/article/16-financial-ratios-for-analyzing-a-companys-
strengths-and-weaknesses.touch
Reuters. (2018). Tesco PLC (TSCO.L). Retrieved from:
https://www.reuters.com/finance/stocks/company-profile/TSCO.L
Sulaiman, L. A., & Migiro, S. O. (2015). Effect of dividend decision on stock price changes:
further Nigerian evidence. Investment Management and Financial Innovations, 12(1),
330-337.
TESCO PLC (2018b). Investors. Retrieved from: https://www.tescoplc.com/investors/
TESCO PLC (2018c). News. Retrieved from: https://www.tescoplc.com/news/
TESCO PLC. (2018a). About Us. Retrieved from: https://www.tescoplc.com/about-us/