It’s been a dismal period for investors in Tesco (LSE: TSCO). It seems that just when things can’t get any worse, they do. Indeed, the company’s share price has taken a huge hit since its first major profit warning in early 2012, with it being a whopping 43% lower since that date. Over the same time period the FTSE 100 is up 24%, meaning that Tesco’s shares have lagged the performance of the wider index by 67%.
However, the future could be much brighter for Tesco and, moreover, it could help you to retire rich. Here’s how.
Dividend Cut
Although Tesco recently announced that it was slashing its dividend, it remains a relatively attractive income play. That’s because shares in the company still yield an impressive 3.5% and, perhaps more importantly, the current payout ratio appears to be highly sustainable.
In fact, with a dividend payout ratio of just 36%, there appears to be scope for Tesco to increase the proportion of profit that it pays out as a dividend – even if profit does not grow moving forward. This means that investors should be able to look forward to a real terms increase in income from Tesco in future.
Turnaround Opportunity
The main cause of Tesco’s troubles has been external factors. Certainly, the company’s foray into the US market was an unsuccessful move, while its decision to slash prices was perhaps a little short-termist. However, the fact that inflation has been higher than wage growth for a number of years has pushed people into shopping at no-frills, discount supermarkets such as Aldi and Lidl.
While there is a long road ahead for the UK economic recovery, Bank of England Governor, Mark Carney, has stated that he thinks wage growth could outstrip inflation as early as mid-2015. This could, in time, cause a shift away from no-frills shopping, as people start to feel the positive effects of a real terms increase in their disposable income. As a result, an economic tailwind could help Tesco’s top and bottom lines to grow over the next few years.
Looking Ahead
Clearly, there is a long way to go in the Tesco turnaround plan. However, shares in the company appear to offer a relatively wide margin of safety at their current price. For example, they trade on a price to earnings (P/E) ratio of 10.3, which is a lot lower than the FTSE 100’s P/E ratio of 13.7.
As a result of this margin of safety, as well as a decent yield and turnaround potential, Tesco could prove to be a strong long term performer that could help you retire rich.