Analysis & Comment > Bond of the Week
Bond of the Week Archive
Bond of the Week: 25 April 2012
Tesco 5.2% 2019: 25 April 2012
Investors have somewhat fallen out of love with Tesco. The grocer was one of the great growth stories of the UK market, but the share price peaked just below £5 in late 2007 and it has struggled to regain positive momentum thereafer. At £3.25, Tesco shares are now some 30% below the high.
Credit rating agency Moodys’ has also lowered its opinion of the company, downgrading Tesco’s credit rating from A3 to Baa1, citing increased competition and potentially lower margins. Should bond investors be concerned? I would say probably not. It may well be true that the company’s growth prospects have cooled, but we should view this in context. Tesco remains a large and highly profitable organisation (£3.8 billion for 2011) with relatively low levels of indebtedness (see link to last reports and accounts here).
What of last year’s new retail issue for Tesco Personal Finance, the banking subsidiary of the grocer? Although Tesco’s bank does not share the parent company’s rating, the Tesco Personal Finance 5.2% Aug 2018 bond has traded lower over the last month (see blue line on chart). This perhaps echoes the negative sentiment seen in the equity and is a noticeable divergence from the range trading behaviour of gilts.
It is also worth bearing in mind that the bank subsidiary has also released it own results (see link here). Profits are up 28.3% and impairment levels are down. This suggests a good outlook for Tesco’s bank, which is in the fortunate situation of being relatively new, and thus unencumbered with the type of balance-sheet horrors faced by its competition.
My view: Most private investors prefer to buy their bonds at par or below. The Tesco Bank 5.2% August 2018 bond stands at 105.5 (mid-price), which works out as a yield of 4.2% YTM. That’s still a premium, and this will dampen some of the demand. However, on a relative basis, the bond is good value. When launched, the bond offered an incremental yield of 2% over gilts of an equivalent maturity. This spread has now widened to nearly 3%, and I would expect the relationship to tighten back in over time.
www.fixedincomeinvestor.co.uk is a division of Stockcube Research Ltd which is authorised and regulated by the Financial Services Authority. The research provided by Stockcube on the Website (and any other Stockcube website) is provided solely to enable investors to make their own investment decisions and does not constitute personal investment recommendations. No recommendations are made directly or indirectly by Stockcube as to the merits or suitability of any investment decision or transaction which may result directly or indirectly from having viewed the investment research on the Website or having received it by email. Investors are therefore urged to seek independent financial advice if they are in any doubt. The value of investments and the income derived from them can go down as well as up, and the investor may not get back the full amount originally invested.
Bonds, as with all investments, are subject to price volatility and in the event of a default an investor may lose some or all of his or her original investment. This site also contains references to derivatives. These are particularly high risk, high reward investment instruments and an investor may lose more than his initial margin requirement. Some foreign currency instruments are also featured and if an investor decides to acquire any investment denominated in a currency different from the his or her own, the investor should note that changes in foreign exchange rates may have an adverse effect on the value, price and income of the investment in the base currency.
None of the services provided as a result of this agreement constitutes a personal recommendation to invest from Stockcube and no service should be construed as such. For the avoidance of doubt, where the word “recommendation” is used elsewhere in these terms it does not refer to a personal recommendation, unless this is explicitly stated. The investments described by or in the services are not suitable for all investors. Investors who have any doubt about whether particular investments are suitable for them should contact an independent financial adviser.
These services do not include personal investment recommendations from Stockcube and should not be construed as such. Stockcube may, at its discretion, provide information, advice, recommendations and research to subscribers from time to time on its own initiative or advise subscribers of other services available. Stockcube will be under no obligation to provide on-going advice in relation to financial instruments covered on this website.