Should I buy Tesco shares before October?

Tesco’s Q1 earnings were flat, and investor patience may soon run out. Will the FTSE 100 stock restore investor confidence in Q2 and should I buy?

| 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.

FTSE 100 stock Tesco (LSE:TSCO) released tepid Q1 earnings last week. City analysts and investors have been patient, but I think the company needs to inspire confidence to attract new investors. Therefore, management decisions in the next quarter will be crucial to turning a corner and bringing strength back to this lagging stock.

Investor pressure

Irish businessman Ken Murphy became the new Tesco CEO last October. He had big shoes to fill as previous CEO Dave Lewis had a strong track record and was popular with shareholders. The appointment of new CFO Imran Nawaz followed Murphy’s arrival in April.

Institutional investors respected Dave Lewis and previous CFO Alan Stewart. They were credited with turning Tesco around after the accounting scandal in 2014, which knocked shareholder confidence. Under their leadership, Tesco moved away from its foreign operations to concentrate on the UK.

Following the sale of its Asian operations earlier in the year, shareholders were rewarded with a special dividend worth almost £5bn. This kept them sweet at the beginning of the year.

Since the crew change, the company has been given the benefit of the doubt, allowing Murphy and Nawaz to find their feet and for the pandemic response to settle. Both men have impressive CVs, coming from Walgreens Boots Alliance and Tate & Lyle, respectively. So, investor expectations are high.

But patience is running thin, and I believe institutional investors are keen to see a share buyback to boost their investment value. The company didn’t announce a buyback in April, which I understand some investors were hoping for.

Tesco’s biggest shareholders include BlackRockSchroders, Norges Bank, Vanguard, and Fidelity.

Institutional investors are a force to be reckoned with and Tesco will want to keep them onside. The institutions already backed activist investors last month to raise sales of healthy foods to 65% by 2025.

Therefore, I imagine they won’t want to wait until October to see what’s next. They’ll likely meet with management in the coming weeks to let them know what they expect. And I think they might apply pressure for serious strategy changes or a share buyback.

Tesco shows underlying strength

While the Q1 results were not outstanding, they compared year-on-year to a period of exceptionally high sales. It was the peak of the pandemic stockpiling, so I actually think growth in Q1 showed strength. UK & ROI sales were up 1.3% and sales at Booker rose 9.2%. But Tesco didn’t raise full year guidance, which may have disappointed some.

Analyst share price targets come in between 220p to 315p, so Tesco shares are currently trading at the lower end of the scale.

I believe the CEO and CFO must be motivated to impress investors. Their own track record has been exceptional, so they won’t want to taint that. Nawaz worked for Kraft Foods when it acquired Cadbury’s, and he has a history of bringing down costs.

Plus, the numbers show customers are still flocking to Tesco. And its wholesale division Booker is recovering strongly as the hospitality sector reopens.

So, I’m tempted to invest in Tesco shares and see what happens in October. If it does announce a buyback or a shake-up of some sort, I expect its share price will rebound. Tesco’s forward price-to-earnings ratio is a reasonable 12. And the 4% dividend yield is also attractive enough to make this a viable long-term investment.

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.

Kirsteen owns shares of Tate & Lyle. The Motley Fool UK has recommended Schroders (Non-Voting) 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.

More on Investing Articles

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »