Tesco shares, when to buy?

Minrich

"Don't think they'll go under" was the one for me and also "Good disposable income" and "feeling hit in the wallet" , so immediately saying they haven't got a good disposable income !
Inflation is 0.5% too

Thrugelmir

Ozzuk wrote: »

Lidl won't float, they are nailing the market and don't need the cash.

Being privately owned means one day they'll be a change of ownership. Empires rarely last forever.

anon_ymous

Minrich wrote: »

"Don't think they'll go under" was the one for me and also "Good disposable income" and "feeling hit in the wallet" , so immediately saying they haven't got a good disposable income !
Inflation is 0.5% too

Yeah I noticed that. Someone mentioned it on Facebook, and I thought "No way inflation is that low" and it turns out to be true... Let's hope we don't slip in to the negatives...

gadgetmind

Ozzuk wrote: »

I don't think they will go under

They don't have to go under for you to suffer a massive loss, perhaps a 100% one. They could run short of cash and go for a rights issue that dilutes your holding such that it will never recover. Alternatively, they might not be able to service their debt, the secured and senior creditors will get everything that's left, and you'll have nothing.

Large companies do sometimes collapse, but a more common scenario is for the holders of the ordinary shares to get wiped out with company (at least in name) sailing on quite happily, often with the same senior management.

Glen_Clark

gadgetmind wrote: »

They don't have to go under for you to suffer a massive loss, perhaps a 100% one. They could run short of cash and go for a rights issue that dilutes your holding such that it will never recover. Alternatively, they might not be able to service their debt, the secured and senior creditors will get everything that's left, and you'll have nothing.

Large companies do sometimes collapse, but a more common scenario is for the holders of the ordinary shares to get wiped out with company (at least in name) sailing on quite happily, often with the same senior management.

Thats a lesson I learned the hard way with Marconi. Their bankers said Marconi was worthless, and being a law unto themselves were allowed to help themselves to 99.5% of the equity in return for the money they were owed, without a shareholder vote.:mad:
Of course Marconi eventually proved to be worth far more than the bankers said it was. But by that time we shareholders only had 0.5% of the equity between us :mad:

Minrich

So ... I am no financial whizz kid and don't want to be .. But where do the shares come from when people are in SAYE schemes ? Are they new shares issued ? If so surely a company cannot go on issuing shares can they .... If they doubled the shares in existence overnight that would halve the value of all of them wouldn't it ?

Ozzuk

gadgetmind wrote: »

They don't have to go under for you to suffer a massive loss, perhaps a 100% one. They could run short of cash and go for a rights issue that dilutes your holding such that it will never recover. Alternatively, they might not be able to service their debt, the secured and senior creditors will get everything that's left, and you'll have nothing.

Large companies do sometimes collapse, but a more common scenario is for the holders of the ordinary shares to get wiped out with company (at least in name) sailing on quite happily, often with the same senior management.

I agree, one of the reasons I'm not currently holding anything in them. I think it's unlikely, though spinning off services is possible, they just aren't attractive as an investment. For me anyway.

And to Minrich, it's more of a case of noticing increased expenditure - shopping obviously varies, but trips to Tesco seem to be getting progressively more expensive, what was £40-£50 shop becomes 60, 70, 80. I also don't like their loyalty scheme - on the reverse though it is usually the only place I'll buy petrol from. Momentum at 1.09 today with another 2p off was welcome.

I think with a move to online shopping people are much more value focused across everything and Tesco just isn't competing on that front, IMO. Personally I hope they can turn it around.

bowlhead99

Minrich wrote: »

So ... I am no financial whizz kid and don't want to be .. But where do the shares come from when people are in SAYE schemes ? Are they new shares issued ? If so surely a company cannot go on issuing shares can they .... If they doubled the shares in existence overnight that would halve the value of all of them wouldn't it ?

Yes, with SAYE they are new shares issued. Usually, shares are issued for cash which means the company has more money (the cash that was building up in someone's saving pot is handed over to the company to keep for itself, to invest in the business operations, instead of being held on trust for the employee in a savings account). So the company is more valuable than it was, but the company is now owned by more shareholders so each share is a smaller fraction of ownership of the company.

With the SAYE schemes people generally buy for a discount, which is why it's a popular incentive scheme - the company will give you a share which someone might pay £2 for on the open market, but you only pay £1.50 because you have an agreed option price. Quite possibly at the moment people would not choose to take the shares because the price they could buy them on a maturing SAYE scheme would be more than the current market price, because Tesco is less valuable than it was 3 or 5 years ago, but I digress.

So imagine there are 10 billion shares in issue which people thought were worth £2 each, valuing the company at £20,000,000,000. And then someone buys another 1000 shares for only £1500. Then the company is a little more valuable because of the cash in its bank account (perhaps it's now worth £20,000,001,500) and there are more shares in issue (10,000,001,000). So the shares that everyone thought were worth £2.00 are now only really worth £1.99999995.

Generally because offering perks and share incentive schemes to workers is a positive benefit to the workers, shareholders are happy for SAYE schemes to be in place. You can keep the employees happy without laying out a load of cash and without the employees paying a load of tax. So this dilutive effect is well known and the shareholders are fine with it, they know about it and build it into their assessment of value anyway.

You are right of course that if the company had 10 billion shares in issue and then issued another 10 billion shares for £0 of cash, then the company isn't any more valuable, each share is now just representing a twenty-billionth of the overall company value instead of a ten-billionth, and if no new cash came in the door, that would "halve the value of all of them wouldn't it", as you say.

So regular SAYE schemes are not really a problem. By contrast, if the company is small and gives away huge numbers of shares for a pittance to a director or his mates in exchange for services which do not turn out to be very good, then, the share issues might be seen as destroying normal shareholder value. You do get that with some companies from time to time. But SAYE in large PLCs is not something to worry about because the figures involved don't really move the numbers in the valuation calculations.

What is a big deal, is if a company falls upon hard times and needs to go fundraising when its market valuation is depressed. If it suddenly needs £2bn of cash to pay off some loans, finance some store improvements and redundancies and match its rivals' price cuts while still paying its normal operating costs, then it has to get the money from somewhere. If it can't borrow at good rates it might issue new equity. Issuing enough shares to generate £2bn of cash at a low share price of £1 is much more 'dilutive' for existing shareholders than if they had done it when the share price was £4.

This is not to suggest that Tesco need £2bn of cash and are planning to go fundraising at £1 a share, but just an educational example. Glen's Marconi example is a similar one.

Of course, Marconi 'eventually turned out to be worth far more than the bankers said it was' so it is clear that people investing (or forgiving loans in exchange for shares) can make good money at the expense of other longstanding shareholders, during a crisis. But taking emotion out of it (albeit without having any actual facts to hand) it is difficult to say that Marconi would have 'eventually turned out to be worth far more' if the bankers didn't let them off the £4bn of loans that they owed. Effectively the whole value of the company was used to pay off the creditors. So the shares that had once been worth £12 became worth less than 2p each. That's what can happen if you invest in a debt-laden telecoms business during a dotcom boom and the debt gets called in when the company's fortunes turn.

Ozzuk

Minrich wrote: »

"Don't think they'll go under" was the one for me and also "Good disposable income" and "feeling hit in the wallet" , so immediately saying they haven't got a good disposable income !
Inflation is 0.5% too

:T

I'm not a Tesco hater, quite the opposite. Sure they have some dodgy business practices (building stores without planning permission) but they aren't the first, and certainly not the worst.

It's great you are in it for the long term and dividend return (I believe last dividend was cancelled) but you can't deny you'd have been massively better off selling when the price was more than double what it is now. Equally though, if we all knew when to sell it would be a very different story!

gadgetmind

Minrich wrote: »

But where do the shares come from when people are in SAYE schemes ? Are they new shares issued ? If so surely a company cannot go on issuing shares can they .... If they doubled the shares in existence overnight that would halve the value of all of them wouldn't it ?

Companies have to get agreements from the shareholders to issue new shares to use for staff incentives, which happens at AGMs. These shares are sometimes in a single pool, and other times ear-marked for different schemes such as SAYE, SIP, EMI, and ESP.

This is why schemes such as SAYE can be over-subscribed and everyone has to be scaled back.

Managing these pools of shares and future commitments can be difficult for company secretaries as some grants have conditions, and employees can also leave the company meaning that anything not yet vested returns to the pool.