Why I’m Putting Tesco PLC On My Watch List

Tesco PLC (LON: TSCO) has lost 50% of its value, and there’s no reason not to take a look.

Mark Stones

Mark Stones (TMFMumbojumbones) joined The Motley Fool in 2014 and initially worked as a writer for Fool.co.uk, before joining the Fool’s analyst programme. Mark earned a BA in English from Loughborough University. Although he spends more time reading annual reports than Russian literature these days, he still appreciates a novelist’s antipathy toward the accepted view, which is a useful attitude when trying to sniff out hidden gems on the stock market. His approach to investing has been largely influenced by the principles of Warren Buffett and Peter Lynch. He also takes a special interest in the work of healthcare companies. Outside of investing, Mark plays guitar, enjoys good writing and has a guilty passion for combat sports.

Published 6 October, 2014 9:20 am BST

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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.

There are no points for original ideas in investing. It only matters if your ideas are any good or not. The proof of that shows in your returns.

It isn’t any secret — backed by many academic studies — that dividend stocks outperform the market over the long term. When stock prices fail to reward — as they have done this year, with the FTSE 100 declining 2% — dividends give investors a regular income stream and, most importantly, a reason to stay invested.

Day to day the market has a 50% chance of moving up or down, but a smart investor — with a time horizon of 20 years or more — will at worst see low single-digit upside on a diversified share portfolio.

All the more reason to hug your income shares.

We’re in a fierce bear market for the UK’s supermarkets. Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US), having long reigned supreme, has lost nearly half of its value in 2014, with shares of the iconic retailer sinking to an 11-year low.

There’s nothing to suggest the shares won’t get cheaper, with a skittish market stampeding for the exits after each new trading statement, and pressure piling on from unforeseen angles, like the accounting inaccuracies that have resulted in an investigation by the Financial Conduct Authority (FCA).

If a leading FTSE 100 member drops 50%, I feel you have to at least take a look. The question is whether the new chief executive, Dave Lewis — who has so far been impressive, promptly suspending four senior directors over the £250m profit anomaly — can deliver a successful turnaround strategy.

Tesco’s roots go back nearly a century to a market stall in East London. Until now, there has never had an outsider in charge. Mr Lewis has only made fairly general statements so far — things like placing an emphasis on ‘putting the customer first’ — and I’m eager to hear more detail on his vision.

The board decided to slash the dividend by 75% to 1.16p which, in and of itself, needn’t be seen as a negative. Tesco must deliver sustained growth, and if it needs more financial flexibility to make sensible strategic investments, then it’s a move I favour. What isn’t sensible is a wholesale investment in price.

I could start selling eggs, bread and milk for 10p on the street and do pretty well in terms of sales. Could I do it forever — without bumping up the price — and make a profit? Of course not. Tesco needs to tempt customers back into its stores from Aldi and Lidl, but not by lowering prices kamikaze-style. Finding a strategic price level that strikes a balance between sales and profitability makes more sense. I’d rather see investments in infrastructure and IT so Tesco can grow its e-commerce channel.