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Should You Follow Director Buying At Tesco PLC And Centrica PLC?

Directors have been splashing the cash at Tesco (LSE: TSCO) and Centrica (LSE: CNA). Should you follow their lead, and load up on shares?

Tesco

Tesco boss Dave Lewis — who took up the reins on 1 September 2014 — has finally answered those critics who had been increasingly raising their eyebrows about his lack of share purchases; and, indeed, about the general dearth of buying by Tesco executives.

It seems that Tesco’s board had banned itself from sharedealing, as it considered itself to have too much privileged inside information on the progress of asset sales. The situation changed on Wednesday, when the company released its half-year results, and announced that further asset sales were off the agenda.

The following day, the directors bought shares en masse, as summarised in the table below.

Director No. of shares Price per share Total investment
Dave Lewis (chief exec) 99,950 200.1p £200,000
Deanna Oppenheimer (non-exec) 51,000 200.4p £102,204
Alan Stewart (finance director) 50,000 202.4p £101,200
John Allan (chairman) 50,891 196.5p £100,000
Richard Cousins (non-exec) 17,357 199.0p £34,540
Mikael Olsson (non-exec) 5,000 200.1p £10,005

So, the board has been happy to nail its colours to the mast at around the 200p mark, on a current-year forecast P/E of 26. The P/E does, though, fall to 19 next year, with analysts expecting a return to earnings growth under Mr Lewis’s continuing initiatives.

Tesco’s total indebtedness (net debt + operating lease commitments + pension deficit) at the half-year end of £21.9bn was little changed from 12 months ago. And falls to £17.7bn when you include the proceeds of the sale of the group’s Korea business, which came after the period end.

Tesco’s debt — particularly the non-cancellable operating lease commitments, which had been rather tucked away in the accounts of previous management — was something I’d been warning investors about for a number of years. It’s good to see progress on this front, with Tesco even managing to regain sole ownership of 21 superstores, and hopefully the company will make further inroads into reducing lease commitments and exposure to inflation-indexed rent reviews.

As to sales and profits, there’s still a long way to go. I was happy to suggest Tesco as a buy at around the lows of 165p at the end of last month. However, after a rise of over 20% to 200p, I see the valuation as being up with events for the time being. The directors would appear to disagree with me!

Centrica

We’ve had no trading news from British Gas owner Centrica since half-year results in July. The company has been through a strategic review under chief executive Iain Conn, who was appointed at the start of this year. The strategy now is to refocus on customer-facing businesses, to reduce and limit scale in oil and gas E&P and central power generation, and to exit remaining wind joint ventures.

Centrica’s shares have drifted lower since the results, and, on the same day Tesco’s directors were busy opening their wallets, Mr Conn was too. He bought 100,000 Centrica shares, and was joined by non-executive director Steve Pusey who picked up 20,000. Both directors paid 235.35p a share, for a combined outlay of £282,420.

A 12-month forward P/E of around 13 and a dividend yield just north of 5%, make Centrica an attractive proposition, in my view, and I can see why Messrs Conn and Pusey would want to buy.

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G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended Centrica. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.