Are Tesco plc and Aviva plc the only stocks you need to own?

Roland Head explains why he believes income investors should focus their attention on Tesco plc (LON:TSCO) and Aviva plc (LON:AV) in June.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Value investors are often guilty of buying and selling their shares too soon. Investors hoping for a recovery at Tesco (LSE: TSCO) have certainly seen a few false dawns. But I believe the firm’s recent progress confirms the start of a genuine turnaround.

Tesco’s net debt fell by 40% to £5.1bn last year. Excessive debt was arguably the biggest financial risk facing the firm, so this should be a relief for shareholders.

Despite a number of divestments, underlying operating profit rose by 1% to £944m. Significant progress was made in the UK, where like-for-like sales rose by 0.9% during the final quarter of the year.

Should you invest £1,000 in Lloyds Banking Group right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Lloyds Banking Group made the list?

See the 6 stocks

Underlying all of this was a significant improvement in cash flow. Operating cash flow from retail operations rose by 39% to £2.6bn, although this did include some of the firm’s discontinued businesses.

Yet despite all of this progress, these figures — from Tesco’s final results — triggered a 15% slide in the supermarket’s share price. One reason for this may be that chief executive Dave Lewis warned that the pressure to cut prices could limit any improvement in profit margins this year.

Investors may be impatient for short-term results, but I think the long-term picture is attractive. In my view, what’s important is that the UK’s largest supermarket is starting to transform itself into an efficient and growing retailer.

At the current share price of 165p, I believe that Tesco shares are an increasingly compelling buy. Forecast earnings per share of 6.5p put the stock on a forecast P/E of 25 for the current year, falling to 18 next year. A dividend yield of 1% is forecast for 2016/17, rising to 2.2% next year.

I reckon now could finally be the right time to invest in Tesco’s turnaround.

Turnaround gets in gear

Over at insurance firm Aviva (LSE: AV), the situation is completely different. Aviva’s turnaround has been under way successfully for some time now. The results make it clear that chief executive Mark Wilson is delivering on his promise to de-risk the firm’s balance sheet and focus on cash flow and new business.

Despite this, Aviva has fallen out of favour in recent months and the shares are down by 12% so far in 2016. In my view, this decline means that Aviva shares now look good value relative to book value, forecast earnings and dividend payments.

Aviva’s latest reported book value is 389p per share. The current share price of 452p represents a P/B ratio of 1.16. This is much lower than peers such as Prudential and Legal & General, which both have P/B ratios of more than 2.

In terms of earnings, current forecasts suggest that Aviva will report earnings of 49p per share this year, and pay a dividend of 23.1p. This puts the stock on a forecast P/E of 9.1 and gives a well-covered prospective yield of 5.1%.

In contrast, Legal & General and Prudential both trade on about 12 times 2016 forecast earnings. While Legal & General’s forecast yield is higher, it’s only covered 1.4 times by forecast earnings, versus cover of 2.1 times for Aviva.

Should you buy Lloyds Banking Group shares today?

Before you decide, please take a moment to review this first.

Because my colleague Mark Rogers – The Motley Fool UK’s Director of Investing – has released this special report.

It’s called ‘5 Stocks for Trying to Build Wealth After 50’.

And it’s yours, free.

Of course, the decade ahead looks hazardous. What with inflation recently hitting 40-year highs, a ‘cost of living crisis’ and threat of a new Cold War, knowing where to invest has never been trickier.

And yet, despite the UK stock market recently hitting a new all-time high, Mark and his team think many shares still trade at a substantial discount, offering savvy investors plenty of potential opportunities to strike.

That’s why now could be an ideal time to secure this valuable investment research.

Mark’s ‘Foolish’ analysts have scoured the markets low and high.

This special report reveals 5 of his favourite long-term ‘Buys’.

Please, don’t make any big decisions before seeing them.

Claim your free copy now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares of  Aviva, Legal & General and Tesco. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Is the Rolls-Royce share price still undervalued in 2025?

After massive growth in the Rolls-Royce share price, Charlie Carman considers whether the FTSE 100 aerospace and defence stock is…

Read more »

Investing Articles

How an investor could target a £43k lifelong passive income starting with just £5 a day

Harvey Jones says it's possible to build a high-and-rising passive income by investing small, regular sums in FTSE 100 shares.…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

£10,000 invested in Lloyds shares on 7 April is already worth…

After a dip in early April, Lloyds shares are back to their 30%+ year-to-date gain in 2025. And analysts are…

Read more »

US Stock

What I’d look to buy as the US stock market heads for the worst month since 1932

Jon Smith sifts through the US stock market to try and find some ideas that have fallen in value recently…

Read more »

Growth Shares

Prediction: I think £1,000 invested in this UK stock could double by 2030

Jon Smith runs through a FTSE 250 stock with a market cap just over £1bn that he feels has the…

Read more »

Investing Articles

With £10k in savings, here’s how an investor could target a second income of £500 a month

£10k in savings could be the foundation needed towards a powerful second income. Our writer details some steps necessary to…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing For Beginners

£1k invested in the FTSE 100 on ‘Liberation Day’ is now worth…

Jon Smith talks about the volatility in the FTSE 100 in the weeks since the tariff announcements and flags up…

Read more »

Long-term vs short-term investing concept on a staircase
Investing Articles

Barclays’ share price is down 7% from March, so is now the right time for me to buy?

Barclays’ share price has dipped recently, which could mean a bargain to be had. I took a deep dive into…

Read more »