Financial Environment

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Financial Environment (ACC2008) 02/12/2008


Investing in shares is one of the best ways to increase your capital. Banks and building societies only give 5% to 8% interest per annum on your capital if you save your money there. Investing in housing market is not safe today as prices of houses are falling. Although shares are unpredictable, history shows they are more consistently over a longer period of time.

The London Stock Exchange (LSE) is on the largest financial market in the world. It has more than 300 years of history and is considered as one of the oldest stock exchanges.The best way to keep up to date of what is going on the LSE is to read The Financial Times (FT). It is a daily newspaper but not issued on Sundays. On Mondays, it gives an overview of way happened on the stock market. Tuesday to Saturday, it gives up to date information about what happen exactly on the market the previous day.

To explain better how the financial market works, let's take a look at the UK Supermarket Industry. This sector is dominated by Tesco, Asda, Sainsbury and Morrison. There are also some small supermarket chain such as Waitrose, Iceland, Aldi and Netto. These are not merely supermarkets which sell groceries but also electronics, home luxuries, garden materials and garment. Most of them trade online as well and do home deliveries. They have lead to the gradual phasing out of regional supermarket chains. Together, these big four have a combine 76.2 % of the market share with Tesco being the number one in a survey dated February 2008 as shown in Graph 1 Below.

Graph 1: Supermarket Market Share - February 2008

Comparing three companies in this sector, namely: J Sainsbury PLC, Tesco PLC and Wm Morrison PLC, over a period of one year, this will show their improvements and how they are doing in the business world as compared to their rivals. All the 3 companies are quoted on the FTSE100 index which is the 100 best listed companies in the UK.

Morrison was listed on the LSE in the year 1967, Sainsbury in 1973 and Tesco in 1947. Tesco became UK number one retailer in 1995, taking over from Sainsbury. Tesco was the first to introduce online grocery shopping in 2000 and is the only international supermarket chain in UK. All of them have an online delivery system and have a system to encourage customer loyalty such a Tesco with its Club card, Sainsbury with its Nectar Card and Morrison with promotion such as "buy 1 get 2 free" and vouchers for customers coming in for consecutive weeks. Tesco and Sainsbury both offer financial services (Sainsbury has an agreement with Halifax Bank of Scotland, i.e. HBOS, to provide this service).


Graph 2: Companies Performance as at Financial Market close on 28th November 2008

These heading can be found in the pages on the FT. Each one of them means something which can be important for an investor.

First 'Company' is just the name of the companies which are listed on the stock exchange market to trade their shares. The symbol next the company name is the company code (e.g. TSCO for Tesco) and the L represents that the company is listed on the LSE. It is just relevant to choose the companies to investor into.

'Price' refers to share prices which are usually expressed in terms of pence and it is calculated by doing the average of the buying and selling price of the shares at the end of the previous trading day (4.30pm for the LSE). Shares are bought at a higher price and sold at a lower price, the difference is known as a bid-spread. This spread is the profit made by person who set the selling and buying price of the shares (Market maker). Some share prices have the letters xd at the end. This means that if someone buys the shares of this company now, they would not receive and dividend for the half of full year. Share price is irrelevant for an investor and the latter cannot only look at share price to invest as although the price of a company share many be high, is may not performance well (e.g. Tesco where the price fell). It only determines the number of shares the investor will get.


Graph 3: Share Prices over a period of 52 weeks.

Graph 3 shows an overview of the share prices over a period of 1 year of the three companies as compared to the index, i.e. FTSE100. The General trend is a downward fall in share prices with some fluctuations. Tesco share prices fell by 39.87 %, i.e. 191p. Sainsbury market share decrease by 36.53 %, i.e. 160.75p. Wm Morrison, however, share prices decreases by a lesser extend then other firms and the index as well (Decrease by 22.93 % - 70.75p). This is mainly due to the acquisition of Safeway by Morrison giving them more retailing option to boost sales, company image and consequently market value of the company

'Change' shows how much the share prices have change the previous day as compared to the day before. On Mondays is shown how much the share prices have changed last week as compared to the week before. It is useful to know how the company is performing over a certain period to see if the company share price is falling, it would not be sensible to investor in the company. Taking a look at graph 2, it is clear the Tesco shares are falling by a massive 2.09 % as compared to Sainsbury and Morrison.

'High' and 'Low' refers to the highest and lowest share price the company has reached in the past 52 weeks. It is relevant as it shows the company performance by showing where the actual share price is located as compared to the highest and lowest in a 52 week period. If the share price is closer to the highest, it means to company is fine although change has to be taken into account whether it is falling or not. Again, Tesco actual price is below its lowest price over the past 52 weeks at a current price of 295.30p. J Sainsbury is near its lowest price but however its prices are increasing. Morrison is in the middle on the road at a current price of 242.50p and increasing slowly.

'Yield' is the dividend received by a shareholder for each share they have and is expressed as a percentage of the share price (i.e. Dividend per share/ Share price). If you are looking for the highest returns on your investment, then the best way is to look for the companies with high yield figures but these high figures can also mean the company is not growing fast or the investment maybe quite risky. Since dividend is decided by company directors, is it not a good measure of the company worth or if it is a good investment. Looking at graph 2, J Sainsbury has the highest dividend yield of 4.41 % as compared to Tesco and Morrison of 3.74 % and 2.04 % respectively. However going for J Sainsbury may not be the best option as it all depends on the profit level of the company.

'P/E' stands for Price/Earnings per Share (EPS) Ratio (i.e. EPS is the profit made after deduction of tax divided by the number of share the company has issued on the market). The 'x' is read as times. It a better measure to see if a company share price is cheaper or more expensive than other companies in the same sector. A high P/E can indicate a high growth rate for the company but it can also mean that returns for the company has gone down temporarily. The P/E ratio will indicate you how many years it would take at the current share price and rate of earnings for the earnings from the share to cover the price of the share. Morrison has a price earnings ratio of 11.66 times which indicates that the current market price per share is greater than its recent earnings. On the basis of the expectations of future profits that the shareholders will assess the value of shares and this shows investors are confident in the future of company and its earnings.

'Volume' indicates the amount of shares which has been trade for the company at the close of the market yesterday. It is calculated by multiplying the number of shares in issue, that is on the market and available to the public, by the share price. This column shows the sum figure in £ millions. A high volume of trade is usually accompanied by a sharp rise or fall in share prices. This helps short term investors who just want to increase their money by investing on growing share prices.

To decide in with companies to invest let's have a look at the ratios that can make a final decision if you have not already made your mind earlier. First we will have a look at the earnings per share (EPS).

			YEAR              Wm Morrison PLC        Tesco PLC

			J Sainsbury PLC         2004                12.59p

			16.45p                  23.40p              2008

			20.8p                   27.02p              19.60p


Graph 4: EPS of Companies Comparison in 2004 and 2008

EPS indicates the company's profitability and it shows the proportion of income that is allocated to each outstanding share of common stock, i.e. the amount of the profit own by each shareholder in the company. In Graph 4, Morrison and Tesco have had a general increase in their EPS ratio through the years. Morrison had an EPS ratio of 12.59p in 2004 and went up to 20.8p as stated on an article dated March 2008 in the 14th Investors Chronicle. Tesco has had a greater increase in their EPS ratio from 16.45p to 27.02p due to their reported increase in their annual profits. However Sainsbury has not been performing as well as its competitors with a fall in the EPS from 23.40p to 19.60p which is quite considerable. Sainsbury had a negative EPS during the last five year period while Tesco and Morrison have had a constant increase in its EPS. Morrison steady increase is due to a huge debt cut of £229m financed with profits and the group is planning to return £1bn of surplus capital through share buy-backs.

Return on Capital Employed (ROCE) gives us the profit earned on the investment in the company. Financial Reports of 2007/2008 shows Tesco has an ROCE of 12.6 % followed by Sainsbury at 8.6 % and Morrison at 8 %. The main reason for this is that, Tesco is perceived as the cheaper supermarket and encourages customer loyalty with its Club Card.

Mr. King (CEO of Sainsbury) said in The Financial Times on the 12th of November 2008 it was "quite something" that Sainsbury's had managed to expand sales by 3.9 % in the 28 weeks to October 4. While Tesco only managed 3.7 % in the 26 weeks to August 23 and it is argued trading period was more difficult. Morrison increase sales by 7% in the first quarter of the financial year. Sainsbury are expecting growth of 3 % to 4 % in 2009 while Tesco only 2 %. The operating margins remained stable at 4.4% and it's like for like sales should continue to grow ahead of its competitors. Two big initiatives in 2008 by Sainsbury have been the "feed your family for a fiver" and "switch and save" campaign encouraging shoppers to buy Sainsbury's own brands. This has lead to an increase in operating profit from 2.88 % to 3.13 % from last year. Tesco had to rebrand the supermarket as "Britain's biggest discounter" as he was losing customers to smaller supermarkets while Sainsbury's was picking off shoppers from the top of the food chain.

However, Sainsbury lost the number one position in three of the UK's 121 postcode areas in the south-east to Tesco over the past year, leaving the latter the dominant retailer in just eight areas around the country. Morrison is gaining most sales around UK with the recent acquisition of Safeway but still needs to convert the latter into Morrison stores. On the other hand Tesco is cutting back its internal budgets and is also negotiating better conditions from suppliers for the Christmas period. The latter also ask non-food suppliers to wait 60 days for payment on goods rather than 30 days.

According to the above facts, Sainsbury can be considered as the winner among the three as they are actually performing better than other companies, Morrison as the mediocre company and Tesco as the loser. Over the last few years, Tesco took over from Sainsbury as UK number one retailer; Morrison may be the next one to take over from Tesco...

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