Bill Jamieson: Superstores no longer seem super–popular

TESCO shareholders had their own vivid experience of supermarket price slashing last week – a sudden 16 per cent drop in the price of their shares.

The company is one of the biggest UK businesses on the London Stock Exchange and is – or was – one of the most widely held, either directly or through unit and investment trusts.

A share price fall of this magnitude is something we expect of smaller, more vulnerable companies. But Tesco? Giant of the food retailers? The company that has done nothing but grow everywhere you look?

“Shock profits shortfall” screamed the City newswires. But was it really? Evidence that Tesco was struggling was evident in the approach to Christmas, and warnings of awful times for retailers have been around for a year or more. Yet a shock it still was to the financial analysts who track the company – 40 teams on one estimate – and the shares suffered one of the biggest falls recorded by a FTSE 100 company.

Nor was there a corrective bounce the following day – the shares limped to close at 316.8p on Friday, for a fall of 19 per cent on the week and 22 per cent over the past 12 months. The 12-month high of 490.5p looks to belong to another world.

Arguably the most worrying feature of last week’s trading statement was not the news of lacklustre Christmas trading – like-for-like UK sales down 2.3 per cent in the six weeks to 7 January – but the warning of standstill profits in 2012.

Whether Tesco’s shares should continue to be held – or added to now they are yielding 4.6 per cent – depends not just on the firm’s immediate response: more investment in UK stores, the shift of non-food sales online and time limits set on losses overseas. It also depends on investor reading of longer-term trends in food retailing.

There is a sense of fundamental sea-change afoot – a consumer swing away from the out-of-town shed retailing towards internet shopping and smaller, convenience and market stall-style food retailing – markedly different to the superstore model into which Tesco has sunk billions.

If this is indeed the first sign of a long-term fundamental change in UK retailing then it is not just the Tesco model that is in trouble but the commercial property sector too, sinking under a glut of unwanted edge-of-town sheds.

I expect Tesco will fight back strongly with a marked change in the style and format of its dated, slogan-driven UK stores, and greater emphasis on its online presence. But it is hard to avoid the conclusion that it is now an income rather than a growth stock. On this argument, it may be worth buying for income on a yield of 4 per cent and more. But growth investors should look to online retailing and smaller leisure or convenience groups capable of taking advantage of the gaping holes spreading across every high street.

Piles of unspent cash are underpinning many firms

A PRIME reason for investing in the stock market is to provide capital for companies to build, expand and sustain profitable enterprise. Yet today it seems many firms are cash piles with businesses tacked on.

UK companies are sitting on record cash holdings with their bank deposits now totalling £724 billion as at end 30 September and equal to 48 per cent of gross domestic product (GDP). This is a record in nominal terms and is up from £220bn, or 22 per cent of GDP, a decade ago.

According to Citigroup economist Michael Saunders, who has perused Eurostat data, UK companies’ cash holdings are by far the highest relative to GDP among the 15 leading EU economies and have risen more than elsewhere in recent years.

The UK coalition government has clearly been hoping companies are poised to splash this cash mountain imminently in job-creating investment. But Saunders said: “We believe this is unlikely and expect that UK firms in aggregate will continue to retain unusually large cash balances for some time, with both investment and employment likely to fall this year.”

So are our businesses opting out of enterprise? Bear in mind that UK firms are still also heavily indebted and that relative to companies in Germany, France and Italy, the UK corporate sector’s net financial position remains quite weak.

One of the reasons why the UK’s corporate cash pile is so high is that companies need to keep a high level of reserves, either to cover any problems arising on debt renewal or to have their own “bank loan facilities” to hand in an environment where so many corporate loan requests to banks are being turned down.

And then there is the vexed issue of investment returns. Saunders notes that liquidity has risen particularly sharply among UK manufacturing firms.

Depressing though this huge cash pile may be as a measure of lack of confidence in future returns from investment in enterprise, it is for the moment providing a vital underpinning for many UK companies.

It is also a prop to current share valuations because without it, UK plc would be in a truly dire state.