Yahoo Finance Questor: buy Tesco – action on the divi and even the chance of a bid
“If Tesco doesn’t raise this year’s dividend by close to double digits I will be very disappointed.” So says one experienced fund manager who thinks the market has failed to appreciate the improving fortunes of this “quiet horse”.
Sue Noffke, who runs the Schroder Income Growth investment trust, a Questor pick, says the threat from the German discounters is past its peak and investors can start to look on Tesco as a “quality compounder” – in many ways, as we have often written, that investment holy grail of consistent generation of cash that can itself be profitably reinvested.
“I think it’s a quiet horse that could make steady running and could come to be seen as a quality compounder: it should be reasonably cash generative and stable,” she says.
“We could see annual shareholder returns in the low double digits over the next few years. Investors have not seen supermarkets as quality compounders for a while – not since before the arrival of the discounters and the deflationary environment of the past few years.”
She says the likelihood of a big rise in the dividend, on top of a share buyback programme, is “not priced in”.
“Shareholders such as ourselves have had to be very patient after the accounting debacle of 2014,” she says. “Tesco has done much to improve its business and I felt that operationally it was delivering, but the share price didn’t want to know.
“Full-year results are due in April and we will be very upset with the company if it doesn’t raise its dividend.”
There is even, she adds, the outside possibility of a bid from private equity. “Tesco is on the large side but perhaps a consortium of bidders could have a try,” she says.
Clive Black, a respected analyst at Shore Capital, the stockbroker, says he rates Tesco as the most promising retail stock in 2022.
“Tesco’s shares are on far from elevated valuation multiples for a stock with a free cash flow yield of 8pc or more,” he adds. “It’s gaining market share and growing earnings too – time to pick Tesco off the shelves.”
The company is due to publish a Christmas trading update tomorrow. While there’s always a risk that you will look silly if you tip a stock just before such an update, because any failure to meet expectations will mean an immediate fall in the share price, we think there is more chance of a positive surprise. Keep buying.
Questor says: buy
Ticker: TSCO
Share price at close: 292.3p
Update: Avacta
It was just as well that when we tipped this biotech company in November 2020 we acknowledged the riskiness of the sector and advised readers to see the stock as a “candidate for a small punt”.
This is because on Monday it told investors that it was taking its lateral flow tests off the market while it adapted them to detect the omicron variant more reliably. The shares fell by a third on the news and our tip is in the red to the same degree.
Fortunately, as we mentioned at the time, Avacta has a second string to its bow: it makes an innovative cancer treatment that becomes active only once it is actually in a tumour, which means that it causes less collateral damage and can therefore be tolerated in higher doses.
Analysts at Stifel, the company’s broker, decided to attribute no value at all to its lateral flow business after Monday’s announcement and instead reiterated their “long-held investment case that Avacta is an oncology company developing some exciting and unique assets based around its [proprietary] technologies”. The change resulted in a fall in its target price from 200p to 155p, which is more than twice the current 75p.
While brokers’ targets are hardly a guarantee, Questor sees at least some recovery in the share price as likely. The stock remains speculative but we will hold on.
Questor says: hold
Ticker: AVCT
Share price at close: 75p
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