The Motley Fool

Do changes at the top make now the time to buy Tesco shares?

A change of CEO can come about for a number of reasons. More often than not, they are negative – a failed strategy to revamp a company, for example, meaning the chief gets ousted by the board. The reasons behind the departure are usually a sign of the share price reaction to come.

It was good news then, when I saw yesterday that David Lewis will be leaving his role at Tesco (LSE: TSCO) not because of anything negative, but rather because it is an all-consuming job that he feels he no longer wants to do… a perfectly reasonable thing that in no way reflects on Tesco itself.

What’s more, the process has seemingly been in the works for about a year, with successor Ken Murphy being immediately announced and taken well by the market.

What next?

With regards to its share price, there are really three main things we need to note about this change in leadership. Most importantly, that there are such a host of factors affecting Tesco stock, new leadership alone may or may not have an immediate impact. Likely it will be far more subtle.

Secondly, Mr Lewis has been by all accounts a successful CEO who has managed to improve the prospects of the company in his five-year tenure. Will his departure change this? Lastly, Mr Murphy is something of an unknown quantity as CEO, and so it may be hard for us to judge how he will run the firm.

With regards to this last point however, though he may have a low public profile, his CV is strong enough for us to consider him a good choice. Though currently a consultant, his latest role was as Chief Commercial Officer (CCO) for US pharmaceutical giant Walgreens Boots Alliance. At its most simplistic, a CCO’s main job is to set out the strategy that makes the company money.

As for Mr Lewis’s departure itself, he leaves the company in good standing. When he came into Tesco in 2014 it was suffering from an accountancy scandal and public criticism over its relationships with suppliers. He turned this around, and consolidated the business by selling off a number of non-core assets.

Everything else

So then, I think it’s fair to say that the change in management will be at worse neutral for Tesco shares, and at best a boon – though that may be a slow burner. It is, perhaps, the other things we need to look at.

Monday’s announcement came as part of Tesco’s latest trading update, which showed some fair numbers – most notably meeting a profit margin target of between 3%-4% ahead of schedule. The margin for the past 12 months was 3.7%, while for the first half of this year it was 4.4%.

Earnings per share were up almost 50%, while importantly for shareholders and potential investors, dividends were up almost 60%. Unfortunately this still means the stock yields less than 2% at its current price, fairly poor when compared to that of its competitor J Sainsbury (LSE: SBRY), which yields almost 5%.

All this said, and though there are some positive arguments to be made in general for the stock, I still feel there is just nothing quite appetising enough to get me interested as of yet.

High-Yield Hidden Star?

Discover the name of a Top Income Share with a juicy 7% forecast dividend yield that has got our Motley Fool UK analyst champing at the bit!

Find out why he thinks “the stock’s current weakness may offer us the chance to buy a proven dividend performer at what could be a bargain price”.

Click here to claim your copy of this special report now — free of charge!

Karl has shares in J Sainsbury. 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.