The Motley Fool

Why I think buying Tesco could help put your State Pension fears behind you

With the State Pension amounting to just £164.35 per week, most individuals are likely to require another source of income in retirement. One means of doing this is to invest in the stock market in order to build a nest egg, providing an added income in older age.

With the FTSE 100 having fallen in recent months, shares such as Tesco (LSE: TSCO) may now offer good value for money. The retailer continues to make changes to its business model, while a rising dividend suggests management is upbeat about its outlook.

Therefore, alongside another growth share which released trading news on Wednesday, now could be the right time to buy Tesco for the long term, in my opinion.

Growth potential

The other company in question is international waste-to-product specialist Renewi (LSE: RWI). Its third quarter update showed it has traded in line with expectations. Its merger integration projects have made good progress, on track to deliver €30m of cost synergies for the 2019 financial year. It then expects to record cost synergies of €40m for the 2020 financial year.

Looking ahead, the company is forecast to post a rise in earnings of 35% in the current year, followed by further growth of 21% next year. This suggests its strategy is working well, with M&A activity and a rationalisation of its asset base set to create a stronger business with improved growth potential.

Despite its bright financial outlook, Renewi trades on a price-to-earnings growth (PEG) ratio of just 0.4. This indicates it offers a wide margin of safety and may be able to generate high shareholder returns over the long run.

Improving business

Although retail shares such as Tesco have struggled to meet changing consumer tastes and adapt to intense levels of competition, the company has improving financial prospects. For example, it’s expected to post a rise in net profit of 19% this year, followed by further growth of 20% next year. Reasons for its improving outlook include a major efficiency strategy which is still ongoing. The company recently announced a headcount reduction, while it continues to focus on core operations as it aims to generate a rising operating margin over the medium term.

Although there are clear risks to the UK economy from weak consumer confidence and Brexit, Tesco’s PEG ratio of 1 suggests those risks may be factored in by investors. Budget retailers such as Aldi and Lidl are likely to pose a continued threat given their ambitious expansion projects. But with Tesco expected to post an improving financial performance, enjoying strong sales as well as operating efficiencies, it appears to offer a sound growth outlook.

As well as this, the company is due to increase dividends over the next two years so it has a yield of 3.4% next year. With dividends due to be covered 2.2 times by profit, its total return could be impressive and may help you to overcome fears surrounding the State Pension.

You Really Could Make A Million

Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, "10 Steps To Making A Million In The Market".

The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide. Simply click here for your free copy.

Peter Stephens owns shares of Tesco. The Motley Fool UK has recommended Tesco. 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.