What will Brexit do to the Tesco share price?

Should I buy Tesco plc (LON: TSCO) shares in the final run-up to Brexit?

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No-deal Brexit could force supermarket rationing” seems typical of the panic-driven headlines doing the rounds since a leaked government document warned of possible shortages of food and medicines.

It struck me that wouldn’t be so good for Tesco (LSE: TSCO), or for the rest of the supermarket sector. And I can’t help wondering if a post-Brexit recession could put paid to the return to sustainable earnings growth that finally seems to be coming Tesco’s way.

The initial few years of big percentage growth as Tesco struggled back from its earnings slump are out of the way, and City folk are now predicting EPS growth of around 10% per year for the next couple of years. I can see that slowing to single-digit percentages over the longer term, which I think would be about right for a major supermarket chain like Tesco.

Steadying

And though the share price has continued with its up-and-down cycles, it’s now around 11% up over the past five years (compared to 8% for the FTSE 100), and I can see it finally settling into a sensible long-term valuation. Forward P/E multiples of around 12-13 seem fair to me right now. With dividend yields set to break 4% by 2021, I could see Tesco shares coming to command a sustainable valuation close to the Footsie’s long-term average of around 14.

That is, unless the wheels come off once we’re out of the EU and facing possible economic turmoil.

Though Michael Gove has tried to distance himself from the food and medicines shortage scenario, saying that the leaked document was old and claiming that non-deal preparation is now more advanced, he’s still admitted “It’s certainly the case that there will be bumps in the road, some element of disruption in the event of no-deal.” Many would see that as a bit of an understatement.

Absurd

It seems absurd to me that an advanced Western country should be on the brink of considering food rationing. Though some folks do appear to be stockpiling in fear of the worst, I’m optimistic our supermarket shelves aren’t going to be stripped bare and food supplies will carry on just fine.

So where does that leave Tesco as an investment? Well, I’ve never been keen on it since its crisis unfolded. Repeatedly, I’ve thought those who’ve claimed Tesco is back and it’s time to pile back into the shares have been… perhaps over-enthusiastic.

Trying to value Tesco shares as a recovery stock, or in short-term growth terms has been, I think, a mistake. What the Tesco of old, the one that Warren Buffett liked the look of, used to be was boring. It was a dull, plodding company which recorded modest earnings rises over the years and paid a fair-to-middling dividend, and whose shares were valued around market average.

Boring

I think that’s what Tesco needs to look like once again to make the shares worth buying — out of the headlines, and back to long-term dullness. And I see that as finally starting to happen. Tesco looks increasingly like a reasonable long-term income investment for an ISA or SIPP, but I might wait until after Brexit as I reckon the shares could dip again.

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.

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.

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