Its been a dismal period for investors in Tesco (LSE: TSCO). It seems that just when things cant get any worse, they do. Indeed, the companys 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 Tescos 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. Heres how.
Although Tesco recently announced that it was slashing its dividend, it remains a relatively attractive income play. Thats 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.
The main cause of Tescos troubles has been external factors. Certainly, the companys 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 Tescos top and bottom lines to grow over the next few years.
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 100s 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.
Of course, it’s not the only stock that could do so. So, which others should you buy, and why?
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Peter Stephens owns shares of Tesco. The Motley Fool UK has recommended Tesco. The Motley Fool UK owns shares of Tesco. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.