Is Tesco's share price still profitable after its rise on strong H1 results?
Despite a 34% increase from its 12 months trading at £2.68, Tesco(LSE: TSCO)'s share price still looks very undervalued to me.
The price-to-earnings ratio (P/E) of the stock is currently trading at 13. This is the second from the bottom of the publicly traded peer group, which has a P/E ratio of 23.8.
The number is slightly skewed J SainsburyBest IP/E of 49.5. However, only to measure the other three – Marks and Spencer (in 17.3), Koninklijke Ahold Delhaize (16.5), and Carrefour (12) – gives a ratio of 15.3. This still leaves Tesco looking cheap.
To find out how cheap it is in cash terms, I did a discounted cash flow analysis using other analysts' calculations and my own. This indicates that the stock is approximately 45% above its current price of £3.58.
Therefore, the fair value of the shares would be £6.51. They may go lower or higher than that, given the vagaries of the market, of course. But it stresses me how much money the stock looks like right now.
Promising results for the future?
Tesco's broad strategy remains focused on value, quality and innovation. This time, H1 of its 2024/25 financial year saw it continue to cut prices across thousands of product lines. It has also launched or developed more than 860 products in collaboration with its suppliers and growers.
The result of these efforts was a 15.8% increase in adjusted operating profit compared to H1 2023/24 with an increase of 4%.
The main risk for Tesco is the re-emergence of the cost of living problem which could reduce the general spending of customers.
However, following H1 results, Tesco expects an estimated adjusted retail operating profit of £2.9bn for the full 2024/25 financial year. This compares with £2.8bn last year. It also maintained its forecast that it would generate £1.4bn-£1.8bn of free retail cash flow in the medium term.
Analyst consensus estimates are that its return on equity will reach 16.6% by the end of 2027.
Should I buy the stock?
My portfolio is designed to make as much dividend income as possible since I'm over 50 now. This should enable me to continue to reduce my work commitments without hurting my overall financial situation.
This company Tesco paid a dividend of 12.1%. This is approximately 3.5% of the current average profit FTSE 100 and more than 3.3%. FTSE 250 specials. But it's a far cry from the nearly 9% average that my high-yielding stocks generate.
That said, if I were 10 years younger, I would seriously consider buying Tesco shares. In its H1 results it increased its interim dividend by 10.4% to 4.25p from 3.85p. If this increase had been applied to last year's 12.1p dividend, the total payout this year would have been 13.4p.
And analysts are forecasting total payouts in 2025/26 and 2026/27 to be 14.2p and 15.3p, respectively. This would produce a yield of 4% and 4.3% based on the current share price.
A positive addition for shareholders is that the grocer is on track to complete its ongoing £1bn buyback by April 2025. This tends to support share price gains.
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