This is what I’d do about the Tesco share price right now

Why I think Tesco plc (LON: TSCO) is looking an increasingly attractive stock, and what I’d do about it.

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That old expression/curse “may you live in interesting times” couldn’t be further from my thoughts on stock market investing.

The dotcom bubble, the banking crisis, the oil price slump, the Brexit fiasco… all certainly interesting. But when I’m choosing shares, give me dull, dull, dull every time.

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Tesco is back

My colleague Roland Head has explained the dullness of Tesco (LSE: TSCO), but after the excitement of its fall and its painful turnaround under new boss Dave Lewis, it is only just returning to the levels of dull that I like to see.

Saying that, with a few more years of EPS growth forecast before Tesco’s earnings trajectory is likely to get back to a plodding reliability, I’m still seeing perhaps a little too much excitement — the stock is even on an attractive growth valuation, with PEG ratios of around 0.7!

Buy?

Still, looking at Tesco from different angles, I think it’s starting to look tempting.

Three years ago, the shares were on a huge P/E of 45. But since the bottom of the recovery cycle, those who saw past that were not far wrong — steady earnings growth should drop the ratio to around 12 in two years time.

But the trouble here is that, looking at P/E valuations of FTSE 100 stocks, I see what I think are better bargains.

Lloyds Banking Group shares, for example, can be had on a forward P/E of only about eight right now. And though Lloyds has been through an uncomfortably exciting spell, with its far stronger balance sheet these days and its refocus on the UK retail market, it’s heading in a comfortably dull direction now.

Cash

What about dividends? Tesco’s are coming back strongly and are expected to yield around 4% by 2021. With predicted cover of around two times, that is attractive.

But I see far more tempting dividend stocks out there, with perhaps my favourite right now being Royal Dutch Shell and its forecast 6% yield. Though you might be concerned about an unstable oil price, the scariness of recent years fell squarely on the shoulders of riskier smaller oil companies. Shell (like BP, which is offering a 5.7% yield) was able to steamroller its long-term dullness over the short-term ups and downs of excitement.

Then there’s that growth-like PEG. But the thing with that is it’s a recovery PEG, and a recovery in earnings after a slump just looks like growth — it doesn’t mean we’re looking at a long-term growth stock.

Even with its far less attractive PEG, I see Diageo as a FTSE 100 stock with better long-term growth potential. And then we have sales and marketing specialist DCC, whose healthy track record of earnings growth looks set to continue for many years yet.

Dullest

And if we turn back again to the desirable of plodding long-term dullness, Unilever is perhaps the finest example in existence today. Its global ubiquity means it’s been able to keep its earnings growing steadily for decades, and healthy cash flow has helped maintain a strongly progressive dividend, currently set to yield around 3.3%.

While I think an investment in Tesco is likely to do well, I just see better opportunities on every count. I’m leaving Tesco shares to other investors. 

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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Diageo, Lloyds Banking Group, and Tesco. 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.

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