The Motley Fool

After dodging a legal bullet, is Tesco plc now a screaming buy?

Last week’s announcement that Tesco (LSE: TSCO) had reached an agreement with the Serious Fraud Office to pay a substantial fine in return for avoiding prosecution for accounting irregularities should put an end to the miserable affair that has dogged the company over the last few years.  

In addition to coughing up £129m, Tesco is also required to compensate those investors who purchased its shares and bonds on or after August 29 and held them until September 22 when news of the scandal broke. When associated costs are factored-in, this means a total exceptional charge of £235m.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Whatever their feelings on the ethics of this arrangement, I doubt many would argue that this development is negative for Tesco and its shareholders. By avoiding a potentially even more costly legal process, CEO Dave Lewis and senior management can now get on with continuing to turn the company around.

So is Tesco now a buy?

Not necessarily. Despite becoming a more streamlined beast under Lewis’s stewardship, Tesco still faces many of the same problems as its listed peers Sainsbury’s and Morrisons. Rising inflation and slowing wage growth are now combining to make shoppers more cost-conscious than ever before. The triggering of Article 50 and the political posturing that inevitably follows won’t help matters.

There’s also the small issue of its proposed ‘merger’ with Booker needing to be approved. Given the strong likelihood of Tesco being required to dispose of a large number of its smaller (and increasingly popular) Express stores to satisfy the Competition and Markets Authority, it’s unsurprising if this deal doesn’t sit well with all shareholders.  

With a price-to-earnings (P/E) ratio of 25 right now, shares in the UK’s biggest retailer certainty aren’t cheap either. A screaming buy? Perhaps not.

Then again…

If all this sounds a bit bleak, perhaps it’s worth reflecting on the many attractions to owning shares in the £15bn cap.

For one, Tesco still commands an enviable market share (27.9% compared to Sainsbury’s 16.5%, according to Kantar Worldpanel), suggesting that most consumers are willing to overlook the company’s questionable past behaviour. This, combined with the fact that Tesco operates in a non-discretionary market makes it a far more defensive investment proposition than most retailers.  

In spite of the steep valuation attached to its shares, a PEG ratio of just 0.8 for this year (falling to just 0.6 in 2018) also indicates that prospective investors will be getting a lot of growth for their money, assuming analyst earnings estimates can be met. Things should become a lot clearer on this front when the company reports its full-year results to the market in just over a week (April 12).

With its balance sheet starting to look healthier, Tesco’s recent pledge to resume paying dividends from the next financial year is another bonus and should bring a smile to those who have stayed with the company throughout the accounting fiasco. A potential 3% yield in two years’ time won’t have investors clamouring for the shares as markets open but — as the company itself frequently reminds us — “every little helps”.

So long as expectations over future share price performance remain grounded in reality, I think Tesco represents a reasonable bet for the long term. 

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Paul Summers has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.