Is now the time to buy Tesco plc, Whitbread plc & Prudential plc?

Edward Sheldon looks at the factors affecting whether whether now might be the time to buy FTSE favourites Tesco plc (LON: TSCO), Whitbread plc (LON: WTB) and Prudential plc (LON: PRU).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It’s been a roller coaster ride for UK investors over the last few weeks. While many blue chip companies have surged higher post-Brexit, other stocks have fallen significantly.

Let’s look at three well known FTSE 100 companies and see whether it’s time to buy these popular stocks.

Supermarket price war

Tesco (LSE: TSCO) may be trading close to five-year lows but I’m not convinced it’s time to buy the supermarket just yet.

It’s no secret that the supermarket landscape is extremely challenging at present with Aldi and Lidl aggressively targeting market share. However it now looks as if the environment is set to become even more challenging with talk that Asda may soon cut prices and launch a price war. Executives at Asda owner Walmart recently stated that Asda will prioritise sales over margins, meaning prices could be cut in an attempt to keep customers coming through the door. Given that Asda has the firepower to hurt its rivals, with the highest margins among its peers, this could have serious consequences for profits across the sector and is bad news for Tesco.

Another issue for me is Tesco’s poor dividend prospects. It’s been a remarkable fall from grace for this former income champion because after paying out 14.76p per share in dividends each year between 2012 and 2014, the company paid just 1.16p per share for FY2015 and nothing for FY2016.

As a long-term investor I don’t mind waiting for a company to turn things around, but I prefer to be paid a dividend while I’m waiting. For this reason, Tesco isn’t on my buy list right now.

Recession resilience

Despite being heavily exposed to the UK economy, I believe the future is brighter for hospitality giant Whitbread (LSE: WTB).

As much as 62% of Whitbread’s revenues come from hotel chain Premier Inn and while leisure stocks can suffer during an economic downturn, the ‘value’ offering of these hotels could be a positive as consumers and businesses cut back.  According to analysts at Deutsche Bank, Whitbread’s hotel business performed better than any other European equivalent during the 2009 downturn, suggesting the company may be able to survive another downturn relatively unscathed.

Another positive is Whitbread’s ambitious expansion plans. It aims to have 85,000 UK Premier Inn rooms by 2020, up from around 65,000 now, and to double Costa sales in the same period.

Whitbread has an enviable track record of revenue growth over the last decade, and with the stock trading on a P/E ratio of 14.8 times next year’s earnings with a 2.5% dividend yield, the company is beginning to look attractive after the Brexit sell-off. I’m cautiously optimistic about the future.

High quality business

Another stock that potentially offers value in the Brexit aftermath is insurance giant Prudential (LSE:PRU).

A high quality business with a strong record of creating shareholder value, Prudential has grown its dividend every year since 2004, with operating earnings in that time growing 13% a year against 8% for Legal & General and 4% for Aviva.

The insurer should benefit from weaker sterling as Prudential’s Asian and US life businesses make up around 30% and 40% of earnings respectively. And with the stock trading on a P/E ratio of just 10.2 times next year’s earnings with a dividend yield of 3.2%, Prudential doesn’t look expensive right now.  

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon owns shares in Whitbread, Legal & General Group and Aviva. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »