Tesco PLC Asia Results Confirm My Buy Rating

Tesco PLC (LON:TSCO) may have failed in the US, but its Asian operations deserve much more respect.

| 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.

Tesco (LSE: TSCO) shares have plunged to a 10-year low of 278p over the last fortnight, as investors threw their toys out of the pram ahead of the UK’s largest supermarket’s annual results announcement.

TescoMarkets hate uncertainty, so I wasn’t surprised to see Tesco’s share price give a modest bounce after its results were published — after all, the company did make pre-tax profits of £2.3bn last year, giving its shares a P/E ratio of just 9.1 times adjusted earnings, and a yield of 5%.

What’s more, Tesco maintained its dividend, as I predicted, meaning that its dividend has not been cut for 30 years, a record few of its FTSE 100 peers can match.

The star in Tesco’s portfolio?

However, although I believe Tesco will turn around its UK operations, what really caught my eye were the results from Tesco’s Asian businesses, which operate in Korea, Thailand and Malaysia.

Total sales rose by 2.6% to £10.3bn, and although profits dropped to £692m, Tesco reported a trading margin of 6.7% for Asia — considerably higher than the 5.0% achieved by its UK operations.

Tesco’s Asian profits accounted for more than 20% of the firm’s trading profits, and that 6.7% margin looks extremely attractive to me, given the flagging profits being reported by all the major UK supermarkets. I believe that Asian growth could help Tesco outperform the UK supermarket sector over the next couple of years.

Indeed, Asia could become doubly important for Tesco if its joint venture with China Resources Enterprise (CRE) in China is successful. The deal gives Tesco a 20% stake in China’s largest food retailing business, and I believe it could become a very valuable long-term asset.

Tesco’s international operations have come in for a lot of criticism, and while its US business was a major failure, I don’t think its Asian efforts should be tarred with the same brush.

Now is the time to buy

Tesco shares really are unbelievably cheap. As I’ve already mentioned, the firm’s shares trading on a trailing P/E of 9.2 and offer a dividend yield of 5.0%.

This undemanding valuation is backed by a property portfolio worth £24bn, providing further downside protection.

Tesco isn’t without its problems, but I believe the firm is a great long-term income buy that should deliver the goods for decades to come. 

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.

Roland owns shares in Tesco but not in any of the other companies mentioned in this article. The Motley Fool owns shares in Tesco.

More on Investing Articles

Mixed-race female couple enjoying themselves on a walk
Investing Articles

Are Raspberry Pi shares a once-in-a-lifetime chance to get rich?

With Raspberry Pi shares surging after a successful IPO, could this UK tech startup offer a long-term wealth creation opportunity…

Read more »

Newspaper and direction sign with investment options
Investing Articles

Huge gains and 9% yields: why now’s an amazing time to be a stock market investor

The stock market’s generating fantastic returns in 2024. Whether you're looking for gains or income, it’s a great time to…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

This steady dividend payer looks like one of the best bargain stocks in the FTSE 100

A yield of 4.7% and a consistent dividend record make this FTSE 100 company look like good value in an…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

£9,000 in savings? That could become passive income of £19,175 a year

It's possible to invest affordable sums of money into building a big passive income stream. Here's how I'd go about…

Read more »

Black father and two young daughters dancing at home
Investing Articles

Legal & General shares: a once-in-a-decade passive income opportunity?

Is a dividend yield at its highest level in a decade, combined with a strong record of increasing payouts, a…

Read more »

Investing Articles

With a 7% yield and 4.1 P/E, is this the best passive income stock on the FTSE 350?

Millions of Britons invest for a passive income. While our writer isn't buying this stock yet, he believes it's worth…

Read more »

Middle-aged Caucasian woman deep in thought while looking out of the window
Investing Articles

This amazing FTSE 250 has a 8.8% dividend yield and trades at just 4x forward earnings!

Our Foolish writer believes this FTSE 250 stock is worth keeping a very close eye on. However, he's not keen…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

Could this brilliant airline stock be the most undervalued company on the FTSE 100?

Our writer believes this FTSE 100 stock may provide market-beating returns over the coming years, noting its undervalued metrics and…

Read more »