Tesco (LSE: TSCO) is certainly going through the wars right now. Its share price had been recovering a little, but it’s slipped by more than 20% over the past 12 months. But is the UK’s biggest seller of groceries a lost cause? Of course it isn’t.
Here are three things that make Tesco look very attractive to me:
1. 30% Market share
Supermarkets are always vying for market share, and if one of them has made up ground against the others, we’re sure to hear about it at full-year results time. But you know what? The movements each way tend to be just a couple of percentage points, with the split in share remaining surprisingly stable.
Tesco is the supplier of more than 30% of all of the UK’s groceries each year. When you’re up against Asda, Sainsbury’s, Morrisons, Aldi, Lidl, Co-op, Spar, Mace, Nisa and countless thousands of smaller shops, and you can still sell nearly a third of the entire country’s groceries, you’re doing something right.
2. 5% dividend
If you’d told me 20 years ago when when I was first getting into this investment lark that one day the UK’s biggest supermarket would be offering a 5% dividend yield, I would have reacted with a certain incredulity — and those were higher-interest days then, too.
But that’s what forecasts suggest — 4.9% for the year ending February 2015 on today’s share price of 290p, rising to 5% for 2016. And it should be about 1.9 times covered by earnings per share, which is very strong. With the shares on a forward P/E of under 11, they just look too cheap.
3. A new broom!
Many have been dissatisfied with the leadership of chief executive Philip Clarke, although I don’t share their feelings. Whoever took over when he did would have faced a business that needed reinvestment in the UK and a refocus on customer retention. Such a change is necessarily a slow one, but the great British investing public is nothing if it isn’t impatient.
But Mr Clarke has resigned to be replaced by Unilever‘s Dave Lewis. And that has already boosted sentiment — the news on 21 July was enough to overcome a profit warning the same day and boost Tesco’s share price by 2% in early trading.
Tesco is fundamentally undervalued, and it can often take a kick in the sentiment to make people realise that.
