Investment Analysis - Tesco, Vodafone - Case Study Example

Midterm Assessment - Money Management Contents My Pension 3 Share analysis Investment analysis 4 Company background (TESCO) 4 Company Background (Vodafone) 5 Analysis of key investment ratios (TESCO) 5 Comparative analysis of investment attractiveness 11 References 12 My Pension A. I have already reached retirement and have Rs. 500000 to meet my future financial needs. But I don’t think that a Life insurance company will be able to provide me a good amount of pension annually as the time period is too short. A pension fund manager invests the entire fund in debt which may give returns, say, 7% per annum. If we have a four year time period, the future value would be 500000*1.07*1.07*1.07*1.07= Rs. 655398. Considering my needs, this amount is very low. Moreover we don’t have sufficient time in our hands, so it is advisable that a Life insurance company will not be able to provide reasonable amount of pension annually. Another alternative is purchasing money back plans of LIC. In the ordinary schemes of LIC, the policy holders receive the payments for the survival benefits at the end of the maturity of the sachem. The balance amount in this scheme is paid to the insured party along with the accrued amount at the end of the twentieth year (Kochis, 2006, p.171-173). In a twenty five year money back scheme, a similar process is followed for twenty years at subsequent periods of 5 years and the balance of 40% of the policy amount along with the accrued bonus is paid at the end of the 25th year. B. I may choose to invest in different schemes of monthly income in mutual funds. These schemes would allow for regular payouts. The invested money is divided into different investing options under the mutual fund. Generally, 30% of the investment can be appropriated to the equity schemes and the remaining amount can be invested in debt so as to reduce risk and ensure a regular income from the investment. This investment scheme does not guarantee regular dividend payments but the payouts are good. I can invest 50% of my money in these funds and 10% in equity funds, considering my risk appetite. I have to invest in those equity funds that focus on dividend yield. The balance money may be invested in fixed deposits of banks or in a company fixed deposit to provide the stability in income. Monthly income schemes can provide me an average 8% return per annum i.e. Rs. 20000 (250000*8%). Equity funds may provide an average 10% return per annum i.e. Rs. 5000 (50000*10%). The bank fixed deposit may provide a return of 7% per annum i.e. Rs. 14000 (200000*7%). I can also go for the various income schemes in the Post Offices which have the privilege of the exemption in the taxes payable for a person. The Post Office savings also have the advantage for the senior citizens because the interest rate received is much higher for them in these schemes. SWP is available in two options i.e. fixed withdrawal and appreciation withdrawal. Dividend distribution taxes are calculated at a rate of 13.5% per annum. So this is the tax that we have to pay if we are reliant on the income from dividends derived from the debt mutual funds. In case of SWP, we pay short term capital gain tax or a long term capital gain tax. Though short term capital gain may be more expensive as it is on the income slab of the investor, long term capital gain will be beneficial as it has a fixed rate of 10% or 20% with indexation (LIC India, 2004). The option of SWP is better as compared to the equity funds. The long term capital gains in the schemes of the equity mutual funds generally have an exemption from taxes. Share analysis / Investment analysis Company background (TESCO) Tesco PLC is located in England, United Kingdom and is a multinational grocery and merchandise retailer. Jack Cohen founded the company in 1919. The company has stores in various countries across Asia, Europe and North America. It is the third largest retailer in the world if we go by its revenue generating capacity. The company is the market leader in the UK having around 30% market share. Company Background (Vodafone) Vodafone is a leading multinational mobile communications company which has its presence in around 30 countries and have entered into partnership agreements with 50 countries. Vodafone has around 70,000 employees all over the world. In UK more than 20 million people use Vodafone services. The Vision of the company is to be the communication leader in world’s mobile. Vodafone achieves the above vision by taking a responsible approach in the way they carries out their business. Analysis of key investment ratios (TESCO) After looking at the P/E Ratio of the company for the past five years, it can be concluded that the company has very good growth potential. It is consistently having a high P/E ratio which means that the investors are willing to pay more money to become shareholders of the company (Morningstar 3, 2014). After having a look at the Market price/Book value ratio of the company for the last five years, it can be safely concluded that it is satisfactory over the years. The company is fundamentally strong and the stock of the company is fairly valued (Weston, 1990, p. 295). Price to sales ratio compares the company’s stock price to its revenues. It indicates the profitability of the company. The price/sales ratio of the company is gradually decreasing which may signal a possible undervaluation (Morningstar, 2014). Price to cash flow indicates the company’s future financial health. The company’s price to cash flow ratio is gradually decreasing which is a concern for the company. The company has to look into why this is happening. It is not a serious case but the company should be aware of the situation from the very beginning and take corrective measures. Low retained earnings are not always desirable for a company as it means low finance for developmental activities. It has to depend on borrowings for funding any new project. After having a look at the dividend % ratios of the company for the past five years, it can be concluded that it is satisfactory. Analysis of key investment ratios (Vodafone) It can be seen that P/E ratio of Vodafone has been fluctuating though it has increased dramatically in 2013 achieving a value of 436.78. The five years average of P/E ratio of Vodafone is 105.91. The Industry average is 16.96 which is less than that achieved by Vodafone plc. This shows that the company has achieved satisfactory P/E ratio and should strive to improve it by increasing profitability (Morningstar 2, 2014). The above table indicates the EPS of Vodafone over the last five years. EPS shows how many dollars is earned by one stock of the company. This is a popular indicator of the overall profitability of the company. This is important for potential and actual stockholders since the future value of a stock depends on the earnings of the company. The higher the EPS the better it is for the company. It indicates strong financial position, higher earnings and thus a reliable company to invest money into. A consistent improvement in the EPS figure is an indication of continuous improvement in the earning power of a company. It is seen that EPS of Vodafone has increased continuously over the period of five years. The five year average of EPS of Vodafone is 1.79 while the industry average is 1.51. This shows that the company is achieving a good healthy EPS but it needs to improve on this ratio to stay above the industry average. The company should look at increasing the profitability by selling higher margin services and differentiated services as compared to its competitors (Weston and Brigham, 1990, p. 59). The industry average is 3.95 which are more than that of the stock. This shows that the company is undervalued (Morningstar 1, 2014). This is an indication of the future financial health of the company. Here the effects of non-cash factors and depreciation are removed. The five year average of price/ cash flow is 12.01 while the industry average is 20.40. This shows that the future financial position is not in as strong position and hence the group has to take appropriate measure to improve the financial position of the company (Gallagher, 2003, 94). The dividend yield of the company is increasing which shows that the shareholders of the company is earning good dividend for the money invested and hence more number of shareholder will start investing into the company (Tracy, 2004, p. 173). Comparative analysis of investment attractiveness It can be clearly seen that P/E ratio, EPS, Price/Sales and Price/Cash flow ratio of Tesco is better than that of Vodafone. Also the dividend received to the shareholders is more in case of Tesco than Vodafone. Thus investment in Tesco is more feasible option for the investor and it can be recommended to avoid investment in Vodafone. References Gallagher, T. 2003. Financial Management. Englewood Cliffs: Prentice Hall. Kochis, S. T. 2006. Wealth Management: A Concise Guide to Financial Planning and Investment Management for Wealthy Clients. CCH: Chicago. LIC India. 2004. Pension Plans - Jeevan Akshay VI. [Online]. Available at: http://www.licindia.in/jeevan_akshay_plan_009_features.htm. [Accessed on February 10, 2014]. Morningstar 1. 2014. Vodafone Group PLC ADR. [Online]. Available at: http://financials.morningstar.com/income-statement/is.html?t=VOD®ion=usa&culture=en-US&ownerCountry=USA. [Accessed on February 10, 2014]. Morningstar 2. 2014. Historical Prices VOD. [Online]. Available at: http://performance.morningstar.com/stock/performance-return.action?p=price_history_page&t=VOD®ion=usa&culture=en-US&ownerCountry=USA. [Accessed on February 10, 2014]. Morningstar 3. 2014. Historical Prices TSCDY. [Online]. Available at: http://performance.morningstar.com/stock/performance-return.action?p=price_history_page&t=TSCDY®ion=usa&culture=en-US&ownerCountry=USA. [Accessed on February 10, 2014]. Morningstar. 2014. Tesco PLC ADR. [Online]. Available at: http://financials.morningstar.com/income-statement/is.html?t=TSCDY®ion=usa&culture=en-US&ownerCountry=USA. [Accessed on February 10, 2014]. Tracy, A. 2004. How to Read a Financial Report: Wringing Vital Signs Out of the Numbers. John Wiley and Sons. Weston, J. F. 1990. Essentials of Managerial Finance. Hinsdale: Dryden Press Weston, J.F. and Brigham, E.F. 1990. Essentials of Managerial Finance. Hinsdale: Dryden Press. Read More