Why I think it’s time to be greedy with the Tesco share price

The Tesco share price could be set to take off next year as the company’s transformation plan finally starts to yield results.

| 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.

After around five years of restructuring its operations, I think now is finally the time to be greedy with the Tesco (LSE: TSCO) share price, as it reaches the end of its transformation programme.

Booming profits

There are several reasons why I’m so optimistic about the outlook for the UK’s largest retailer right now. For a start, the enterprise is finally back to where it was in 2014 before the accounting scandal broke and a new management team had to be bought in to restore confidence in the business and improve the customer experience. 

As part of this turnaround, the company’s loss ballooned to nearly £6bn in 2015. City analysts believe Tesco’s net profit will come in at £1.7bn for fiscal 2020, rising to £1.8bn for fiscal 2021. That’s nearly double the £974m net profit figure reported for 2014, before the accounting scandal broke.

And as profits have recovered, management has been quick to reinstate the firm’s dividend. In 2019, Tesco paid out 5.8p per share in dividends to investors, giving a dividend yield of 2.6% on the current share price. City analysts believe the company will hike its distribution to 8.3p for 2020 and 9.2p for 2021, giving a potential dividend yield of 4.1% on the current share price for the 2021 fiscal year.

These numbers suggest that after a five-year break, Tesco has finally recovered its crown as an FTSE 100 income investment.

Reinforced position

As well as Tesco’s profit recovery, I’m also impressed by how the group has been able to consolidate its position as the UK’s largest retailer over the past half-decade.

The acquisition of wholesaler Booker several years ago gave the company a unique position in the wholesale market, as well as improving its negotiating position with suppliers. This is one of the reasons why the group’s profits have surged in the past two years.

What’s more, it’s going to be much harder for competitors to unseat Tesco from its position at the top of the market now it owns a much more significant market share. The German discounters are still expanding aggressively across the UK but, despite this threat, Tesco’s bottom line is still set to increase. 

Attractive valuation

The third and final reason why I think now could be a great time to be greedy with the Tesco share price is the stock’s current valuation. At the time of writing, shares in the retailer are dealing at a forward P/E of 13.4, falling to 12.4 for fiscal 2021. 

I would say this valuation is about appropriate for the business, although I think there’s also an excellent argument to be made that these multiples undervalue the group, considering its size and dominance of the UK retail market.

The rest of the UK retail industry is dealing at a median P/E of around 12.5, and I think Tesco certainly deserves a premium over this average.

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.

Rupert Hargreaves owns no share 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.

More on Investing Articles

Investing Articles

2025 stock market recovery: a once-in-a-decade chance to get rich?

Zaven Boyrazian explains how he'd use the ongoing stock market recovery to his advantage, creating long-term wealth.

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

£20,000 in an ISA? Here’s how I’d aim to make £1,250 a month in passive income

Our writer thinks one rare FTSE 100 stock could help drive an ISA portfolio higher, resulting in a sizeable passive…

Read more »

Black father holding daughter in a field of cows
Investing Articles

£25k of savings? Consider aiming for a £1k+ monthly passive income via this strategy

With a long-term mindset, investors could target a four-figure monthly passive income by investing £25k in low-volatility blue-chip stocks.

Read more »

Investing Articles

The Rolls-Royce share price hit new highs in November. What next?

November has been another record-breaking month for the Rolls-Royce share price. And the outlook for 2025 still looks bright.

Read more »

Investing Articles

Here’s the growth forecast for Sage Group shares to 2026!

Sage Group shares have rocketed following the tech firm's stunning third-quarter update. Is now the time to consider buying in?

Read more »

Investing Articles

10%+ dividend growth! 2 FTSE 250 shares tipped to turbocharge dividends

These FTSE 250 income shares look in great shape to grow their dividends by double-digit percentages, says our writer Royston…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Investing Articles

Would it be madness to buy this FTSE stock smashed by Donald Trump’s team picks?

Ben McPoland takes a look at one FTSE share inside his portfolio that has been battered lately due to a…

Read more »

Investing Articles

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »