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Here’s why I think the Tesco share price will stagnate in 2020

Alan Oscroft
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Tesco (LSE: TSCO) revealed the next step in its refocusing strategy on Tuesday, the selling of its 20% share in Gain Land to joint venture partner China Resources Holdings. Tesco will pocket approximately £275m from the deal, though that’s apparently not earmarked for anything special.

In itself it’s no big deal, but it follows on from last September’s sale of Tesco Bank’s entire residential mortgage portfolio. That sale to Lloyds Banking Group, valued at £3.8bn, dwarfed the latest disposal, and marked a key milestone in Tesco’s progress.

These are definitely good things for Tesco to be doing, reversing its previous over-stretching and concentrating on its key strengths. But pondering this turnaround makes me think back to the Tesco of the past, and to how hard it can be to see the truth of a company’s situation.

Reversal

Before the supermarket giant’s identity crisis, all these overstretched ventures were exactly what we were praising it for. I remember lauding Tesco’s vision in expanding into banking, and spreading its tentacles worldwide. When I could see banking leaflets at Tesco’s checkouts, and shop at Tesco Lotus as far away as Thailand, I was confident that I was looking at an increasingly diversified and truly global company.

Such global companies do exist, of course, and I’m immediately reminded of Unilever, Diageo and Reckitt Benckiser. All three reach around the globe, and sell many products that most people here in the UK haven’t even heard of. Go on, try and guess who makes Sariwangi, Rumple Minze and Electrasol. And maybe guess what they are?

Focus

These three do focus on their key product areas, mind. And Tesco’s ventures into mortgages, car sales and other areas were well outside of that approach. But why didn’t its forays into global supermarket businesses prove lucrative? I’m really not sure. Would I be able to see future similar ventures by other companies clearly, and analyse their potential accurately? Probably not.

But I don’t feel too bad about that, because I’m in good company. Even Warren Buffett got Tesco wrong.

In refocusing on its key strengths and markets, Tesco is doing something similar to Lloyds. The banking giant has turned itself into a UK-focused retail bank, removing itself from many of the problems that led to the financial crisis.

I think both companies are doing the right thing, so why am I happy to own Lloyds shares but wouldn’t buy Tesco? It’s largely because I see too much competition in the supermarket business, coupled with a lack of differentiation and increasingly squeezed margins.

Competition

I do sometimes shop at Tesco and was there last weekend. But that’s only because I had big items to buy and the Aldi car park is a pig to get in and out of (I almost made it to the end of a Tesco article without mentioning Lidl or Aldi, but I just couldn’t do it.) Tesco currently enjoys the UK’s biggest market share, but I can only see that falling.

Once its recovery phase passes, I expect slower growth. And while dividends are forecast to reach nearly 4% by 2022, I expect longer-term downward pressure there. And I see better long-term dividend prospects elsewhere.

Tesco shares look fully valued to me, and really I don’t expect them to go anywhere over the next couple of years.

The post Here’s why I think the Tesco share price will stagnate in 2020 appeared first on The Motley Fool UK.

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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Lloyds Banking Group, Tesco and Diageo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020