Is Tesco PLC An Annuity Alternative?

Annuity giant Legal & General expects the UK annuity market to halve in size following the changes announced to pension rules in this year’s Budget.

That means that the £12bn annuity market could shrink to just £6bn — leaving an extra £6bn per year in the hands of investors, many of whom are likely to invest their pensions in dividend stocks.

tescoTesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) is out of favour with investors at the moment, and its share price has slumped to just 289p — lower than at any time since the depths of the financial crisis.

However, I reckon the Cheshunt-based supermarket’s shares are a screaming buy. Retirement investors looking for long-term income should take note of the fact that Tesco has not cut its dividend for 29 years — and I don’t think it’s about to start now.

Here are three reasons why I’m adding using the current weakness to add more Tesco to my retirement fund:

1. Cheap as chips

Tesco is out of favour with investors at the moment, and it shows. The supermarket giant’s shares currently trade on a P/E of just 9.6 times forecast earnings, and offer a prospective yield of 5.1%.

In my view, that’s too cheap — Tesco has £25bn of property, plant and equipment on its balance sheet, yet its current enterprise value (market cap plus net debt) is just £31bn. Is Tesco’s profitable retail business — with sales of £64bn per year — really worth just £8bn?

2. Online potential underestimated

Tesco recently revealed that those of its customers who shop online and in-store spend more than twice as much as those who shop in-store only.

Unsurprisingly, the firm is working hard to integrate its in-store, online and general merchandise (non-food) offerings more closely, and I believe that this could enable Tesco to become one of the UK’s biggest online retailers over the next decade.

3. 43 million Clubcard members

Tesco’s Clubcard loyalty scheme has 43 million customers globally, and provides an insight into 400 million households, thanks to its partnerships with other retailers.

It’s hard to exaggerate how valuable this is — and will become — in enabling Tesco to personalise its relationships with its customers, and develop bespoke offerings for them that should drive additional sales.

Put Tesco in your retirement fund

I believe Tesco is an ideal 'annuity alternative' share. However, if you already own Tesco, I have another suggestion.

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Roland owns shares in Tesco but not in any of the other companies mentioned in this article. The Motley Fool owns shares in Tesco.