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The Tesco share price after shock Dave Lewis departure news: what I’d do now

Tesco (LSE: TSCO) shocked us on Wednesday when it announced the planned departure of CEO Dave Lewis, the man credited with turning the supermarket giant around.

‘Drastic Dave’ had, apparently, for some time been considering the best opportunity to hand over the reins and move on, so the company was prepared. Chairman John Allan said “Dave has done an outstanding job in rebuilding Tesco since 2014,” and the company does seem to be back on a solid forward path now. The new boss will be Ken Murphy, who has considerable experience with Alliance Unichem and with Boots.

Sweeping clean

Lewis’s drastic approach, which commenced with his revelation that the company had previously overstated its profits by £326m, was very much the new broom one that we often see when new management is installed at a company. Where a previous incumbent might be, perhaps understandably, somewhat reticent over revealing the full extent of the mess they have overseen, a new boss really can clean out the cobwebs without attracting any of the blame.

Investors did sometimes appear to be over-eager and piled into a few false starts along the way, and for the first few years after Tesco’s big crunch there was, I think, a feeling of entitlement that Tesco simply had to be top of the pile. But it was always going to be a longer job than many seemed to expect, and I think a lot of investors failed to ask what I think was the key question: “Forget the past, is Tesco worth buying as if it were a brand new company?

Share price

The Tesco share price has dipped a little since the departure announcement, negating the uplift provided by the firm’s interim results on the same day, but it’s hard to be sure if that was any more than the general malaise that’s been hitting the FTSE 100.

The questions in investors’ minds now will, presumably, hover around the ability of the company to continue on its new growth trajectory without Dave Lewis, and I think the signs are good. Though his intention to leave has come as a surprise to Tesco shareholders, the fact that it’s been in the planning stages for some time suggests to me that both Lewis and the board are genuinely confident in the timing.

The chairman also said: “Today’s results confirm that the Tesco turnaround has been delivered. Under Dave’s leadership, Tesco has transformed customer satisfaction and rebuilt the business.” The first-half figures looked very steady against the background of today’s tough economy, with strong operating profit growth (and an impressive 4.4% margin), allowing the board to hike the dividend by 59%.

Dividend is key

Getting the dividend back to an attractive yield and progressive rises was always, I think, going to be the measure by which Tesco’s return to long-term health was to be judged. And on that score, the company has delivered. Would I buy the shares now?

Well, personally I wouldn’t. I really see little differentiation in the groceries business today apart from price competition (especially from Lidl and Aldi), and a sector in that condition is not one in which I want to invest. But if supermarket shares fit your strategy, I think Tesco looks like reasonable long-term value.

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Alan Oscroft has no position in any of the shares mentioned. 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.