Is Tesco PLC Still A Buy After The 2013 FTSE Bull Run?

Tesco PLC (LON:TSCO) should continue to reward income investors, despite its troubles, says Roland Head.

| 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.

2013 has been the year in which even the most hardened stock market bears have admitted that we’re in a five-year bull market — and it’s not over yet.

Although the FTSE 100 has slipped back from the five-year high of 6,875 it reached in May, it is still up 8.8% this year, and is 53% higher than it was five years ago. As Christmas approaches, I’ve been asking whether popular stocks like Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) still offer good value, after five years of market gains.

Back to basics

Of course, while the wider market has enjoyed a five-year bull run, Tesco shareholders have not. Shares in the UK’s biggest supermarket currently trade within 2% of their price five years ago, and even the supermarket’s legendary dividend — which grew for 28 years — was put on hold in 2012, and is also expected to remain unchanged this year.

However, as potential buyers of Tesco today, we need to focus on whether Tesco stock is good value at its current price:

Ratio Value
Trailing twelve month P/E 24.7 (based on continuing operations)
Trailing dividend yield 4.6%
Operating margin 4.9%
Net gearing 52.8%
Price to book ratio 1.7

Tesco’s trailing P/E has spiked this year, as a result of the firm’s decision to exit its loss-making US operations and write down various assets last year. There are signs of strain elsewhere, too — Tesco’s net gearing of 52.8% is higher than J Sainsbury or Wm. Morrison Supermarkets, while its price to book ratio of 1.7 is also considerably higher than Sainsbury’s (1.3) or Morrison’s (1.2).

Tesco’s share price may be being supported by its attractive yield, to some extent; at 4.6%, it is higher than Sainsbury’s, and is roughly on a level with Morrison’s payout.

Turnaround in 2014?

Tesco’s earnings are expected to return to something like normal in 2013, with consensus forecasts indicating adjusted earnings per share of around 31.3p, placing the shares on a P/E of 10.4.

Further gradual improvement is expected in the 2014/15 financial year, including a modest dividend increase, which makes Tesco shares look potentially good value:

2014 Forecasts Value
Price to earnings (P/E) 10.0
Dividend yield 4.8%
Earnings growth 3.5%
P/E  to earnings growth (PEG) 8.9

In post-crisis Britain, UK supermarkets are fighting for a larger slice of a smaller pie, as average household incomes lag behind inflation, putting pressure on consumer spending.

This trend — plus the competitive nature of the supermarket business — means that Tesco’s turnaround won’t be a quick process. The firm’s low forecast earnings growth rate is all that realistic investors can hope for, in my view, but its reliable dividend remains appealing.

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.

> Roland owns shares in Tesco but does not own shares in any of the other companies mentioned in this article. The Motley Fool owns shares in Tesco and has recommended shares in Morrisons.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

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

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »