While Tesco’s (LSE: TSCO) share price has pulled back a little over the last two months, and subsequently trades at a slightly lower valuation than it did in mid-April, the stock continues to look unappealing, in my view.
Only last week, I was discussing the persistent threat that the German discount supermarkets Aldi and Lidl represent to the UK’s largest supermarket and developments in relation to the discounters since then do not look good for the grocer. Indeed, according to a report earlier this week, Lidl is planning to open 40 new stores in London and the south-east of England over the next five years, in a move that could put further pressure on Tesco’s market share.
Yesterday’s trading update from the FTSE 100 supermarket giant was far from inspiring. For example, for the 13 weeks to 25 May, the group managed like-for-like sales growth of just 0.2%. This was lower than some analysts had been expecting. The shares don’t look particularly expensive right now (forward P/E of 13.5), but given the challenging landscape Tesco is likely to face in the years ahead, I think there are much better FTSE 100 stocks to buy right now.
This company has momentum
One FTSE 100 company that I continue to believe is significantly undervalued at present is packaging group DS Smith (LSE: SMDS), which specialises in the manufacturing of sustainable corrugated packaging (the kind of packaging that an Amazon delivery arrives in). Its shares were beaten down in the fourth quarter of 2018 on the back of global growth concerns and are yet to recover. I think this has created an attractive buying opportunity.
The group released full-year results yesterday and the numbers looked good. Revenue for the year jumped 12%, while adjusted profit before tax surged 31% and adjusted earnings per share rose 8%. I was particularly pleased to see the dividend hiked 13% to 16.2p per share – 0.4p above the consensus dividend forecast. CEO Miles Roberts said that the group is “increasingly well-placed to capitalise on rising consumer demand for sustainable corrugated packaging” and that he is expecting “further good progress in the coming year.” The market was clearly impressed with these results, as the stock jumped 5% yesterday.
Super dividend stock
One reason I like DS Smith is its dividend appeal. Not only is the yield attractive at 4.5% (4.8% for FY2020), but the company has lifted its dividend by over 60% over the last five years, which indicates that the business is growing at a healthy rate, and also that shareholders are a priority for the group. Further dividend growth is anticipated in the years ahead. Additionally, dividend coverage is strong at over two times, suggesting that the current dividend payout is sustainable.
For the year ending 30 April, analysts expect DS Smith to generate earnings per share of 37.5p, which puts the stock on a forward-looking P/E of just 9.6 at the current share price. Given the company’s recent growth, I think that’s a bargain. As such, I’d definitely pick DS Smith shares over Tesco shares right now.
