There’s some big news from Tesco (LSE: TSCO) today (9 February). In an announcement made first thing this morning, the company told investors that it’s selling its banking operations to Barclays. So, what does this mean for the share price? And should investors consider buying the stock now?
Selling to Barclays
Tesco has said that its existing banking operations in credit cards, loans, and savings will be sold to Barclays but it will retain insurance, ATMs, travel money, and gift cards.
In return, the group expects to receive around £600m of proceeds, plus around £100m further net cash after the settlement of certain regulatory capital amounts and transaction costs.
Combined with the previously announced special dividend of £250m paid by Tesco Bank in August 2023, this is expected to result in total cash received of around £1bn.
Tesco also announced that it has formed a strategic partnership with Barclays, initially for 10 years. This will see Barclays offer Tesco-branded banking products and services.
Will this boost the share price?
I think this deal is likely to support the share price in the medium term.
For a start, it’s set to remove almost £7bn in financial liabilities from Tesco’s balance sheet. In other words, the company will be in a stronger position financially.
Second, Tesco has said that the ‘majority’ of the £1bn cash will be returned to shareholders in the form of an incremental share buyback. This should boost earnings per share.
Let’s say the company bought back £900m worth of shares at today’s share price of £2.84. That would result in about 317m shares being repurchased.
Currently, Tesco has around 7bn shares in issue. So, 317m shares would equate to about 4.5% of the issued share capital, which is quite significant.
Is now the time to buy?
Should investors consider buying the shares now? I think so.
Tesco is performing quite well at present. Recently, it upgraded its profit outlook for the second time in four months.
Yet while the shares have had a good run over the last 12 months, they still look quite attractive from a valuation perspective. Taking the earnings forecast for the year ending 28 February 2025 (25.7p), the forward-looking price-to-earnings (P/E) ratio is only 10.9. That’s well below the FTSE average.
There’s also an attractive dividend on offer. Currently, the yield here is above 4%.
It’s worth noting that there has been some bullish broker activity recently. Earlier this month, analysts at HSBC raised their target price to 355p from 340p while Morgan Stanley named Tesco as its top European food retailer. This is encouraging.
Of course, the company does face risks. It operates in a very competitive industry. Going forward, it’s going to be facing stiff competition from both budget supermarkets (Aldi and Lidl) and more premium retailers (Marks & Spencer and Waitrose). These companies could steal market share.
All things considered, however, I think Tesco is a solid defensive stock.
