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Should I buy Tesco shares before October?

Image: Tesco

FTSE 100 stock Tesco (LSE:TSCO) released tepid Q1 earnings last week. City analysts and investors have been patient, but I think the company needs to inspire confidence to attract new investors. Therefore, management decisions in the next quarter will be crucial to turning a corner and bringing strength back to this lagging stock.

Investor pressure

Irish businessman Ken Murphy became the new Tesco CEO last October. He had big shoes to fill as previous CEO Dave Lewis had a strong track record and was popular with shareholders. The appointment of new CFO Imran Nawaz followed Murphy’s arrival in April.

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Institutional investors respected Dave Lewis and previous CFO Alan Stewart. They were credited with turning Tesco around after the accounting scandal in 2014, which knocked shareholder confidence. Under their leadership, Tesco moved away from its foreign operations to concentrate on the UK.

Following the sale of its Asian operations earlier in the year, shareholders were rewarded with a special dividend worth almost £5bn. This kept them sweet at the beginning of the year.

Since the crew change, the company has been given the benefit of the doubt, allowing Murphy and Nawaz to find their feet and for the pandemic response to settle. Both men have impressive CVs, coming from Walgreens Boots Alliance and Tate & Lyle, respectively. So, investor expectations are high.

But patience is running thin, and I believe institutional investors are keen to see a share buyback to boost their investment value. The company didn’t announce a buyback in April, which I understand some investors were hoping for.

Tesco’s biggest shareholders include BlackRockSchroders, Norges Bank, Vanguard, and Fidelity.

Institutional investors are a force to be reckoned with and Tesco will want to keep them onside. The institutions already backed activist investors last month to raise sales of healthy foods to 65% by 2025.

Therefore, I imagine they won’t want to wait until October to see what’s next. They’ll likely meet with management in the coming weeks to let them know what they expect. And I think they might apply pressure for serious strategy changes or a share buyback.

Tesco shows underlying strength

While the Q1 results were not outstanding, they compared year-on-year to a period of exceptionally high sales. It was the peak of the pandemic stockpiling, so I actually think growth in Q1 showed strength. UK & ROI sales were up 1.3% and sales at Booker rose 9.2%. But Tesco didn’t raise full year guidance, which may have disappointed some.

Analyst share price targets come in between 220p to 315p, so Tesco shares are currently trading at the lower end of the scale.

I believe the CEO and CFO must be motivated to impress investors. Their own track record has been exceptional, so they won’t want to taint that. Nawaz worked for Kraft Foods when it acquired Cadbury’s, and he has a history of bringing down costs.

Plus, the numbers show customers are still flocking to Tesco. And its wholesale division Booker is recovering strongly as the hospitality sector reopens.

So, I’m tempted to invest in Tesco shares and see what happens in October. If it does announce a buyback or a shake-up of some sort, I expect its share price will rebound. Tesco’s forward price-to-earnings ratio is a reasonable 12. And the 4% dividend yield is also attractive enough to make this a viable long-term investment.

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Kirsteen owns shares of Tate & Lyle. The Motley Fool UK has recommended Schroders (Non-Voting) and 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.

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