Why I’d buy this bargain dividend stock instead of Tesco plc

Forget Tesco plc (LON: TSCO) and check out this dividend darling instead!

| 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.

According to recent reports, sales of new cars in the UK have been falling over the past few months, but there’s little sign of the pain in this morning’s interim results from Lookers (LSE: LOOK).

Good results

In the first half of the year, the UK-focused motor retail and after-sales services firm scored a revenue increase of 5% compared to a year ago and earnings per share from continuing operations lifted a healthy-looking 15%. The directors used some of the incoming cash flow to reduce net debt by more than 16% to £44.6m, and some to raise the interim dividend by 10%.

I find the dividend decision to be interesting because it speaks volumes about how the directors perceive the immediate prospects for the business. It seems unlikely that they would raise the dividend and commit the firm to the further expense if they believed the immediate outlook for business to be poor.

Chief Executive Andy Bruce adds weight to the theory, saying in the report: Our order book for new cars for the important month of September is continuing to build in line with our expectations and the new car market for this year is still forecast to be at a historically high level.”

A reassuring outlook

The firm’s outlook statement clarifies further, explaining that the company expects the new car market to reduce slightly while remaining historically high. On top of that, Lookers is seeing further increases in used car volumes and is growing its share of that market. I reckon used car sales could help balance any further easing of new car sales if economic hardship bites any deeper into consumers’ incomes.

I can’t deny that the firm operates in a cyclical sector, which probably accounts for recent share-price weakness. But at today’s 109p, the forward dividend yield runs around 3.7% with City analysts following the firm expecting forward earnings to cover the payout almost four times. Over the past five years, the dividend has grown 67%. I think the value here looks compelling, despite cyclical uncertainties.

Long-term challenges

I’d rather take my chances with Lookers than with troubled supermarket giant Tesco (LSE: TSCO). At first glance, the numbers look quite good. Today’s 179p share price throws out a forward dividend yield of just over 2.9% for 2018 with City analysts forecasting cover from forward earnings around 2.4 times. However, after a near three-year absence, dividend payments are anticipated to restart during the current trading year – the firm’s dividend record leaves a lot to be desired.

City analysts following the firm anticipate resurging earnings this year and next year, but I think squeezing earnings out of the business can only go so far, and the longer-term prospects of the firm will depend on growth in revenues. And that’s the problem. Last year’s annual report showed revenues rising just 1% or so. Tesco seems to be struggling to maintain UK grocery market share against the onslaught of fast-growing competitors such as Aldi and Lidl. I see Tesco as a colossus in long-term decline so will continue to avoid the firm’s shares.

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.

Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Middle-aged white man pulling an aggrieved face while looking at a screen
Investing Articles

£10,000 invested in Greggs shares 5 years ago is now worth…

Investors flocked to Greggs shares for an appealing mix of growth prospects and passive income following the pandemic. But things…

Read more »

Bearded man writing on notepad in front of computer
Investing Articles

I’m getting nervous about the Lloyds share price

The Lloyds share price has soared by more than 50% over the past 12 month, easily beating the wider FTSE…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

Meta stock is up 17 days in a row! Time to buy this record-setter?

Our writer wonders whether now is the time for him to add Meta stock to his ISA portfolio after its…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

4 good reasons why I’m avoiding cheap Lloyds shares like the plague!

Lloyds shares look dirt cheap based on earnings, dividends, AND asset values. But is the FTSE 100 bank a risk…

Read more »

Young brown woman delighted with what she sees on her screen
Investing Articles

31% revenue growth! This top growth stock just keeps powering on

Shopify (NYSE:SHOP) smashed it in the fourth quarter, wrapping up an outstanding 2024. But is this growth stock worth considering…

Read more »

Investing Articles

Down 23% in a year, is Frasers Group a FTSE 250 bargain?

Christopher Ruane explains why he is taking the Buffett approach by sticking to what he comfortably understands. That does not…

Read more »

The words "what's your plan for retirement" written on chalkboard on pavement somewhere in London
Investing Articles

How much would someone need to invest in the stock market to retire and live off passive income?

Christopher Ruane explains some approaches and potential pitfalls of putting money in the stock market to try and retire early…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Growth Shares

This little-known technology company is now the 6th-largest business in the FTSE 100

Over the last few years, this under-the-radar technology business has quietly become one of the largest companies in the FTSE…

Read more »