Despite weaker sentiment following its recent trading update, Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) has seen its share price rise by a hugely impressive 19% since the turn of the year. Clearly, much of this improvement is due to the companys shares trading at or near to a twelve year low, with value investors apparently finding the opportunity to purchase Tesco at such low levels irresistible. However, Tescos future could hold great promise and the stock may be very appealing for growth investors, too. Heres why.
While Tescos management team were seemingly at pains to point out in the companys recent update that the turnaround strategy will take time to come good, Tesco may be on the brink of surprisingly strong bottom line performance. Certainly, the companys rationalisation plans will take time to have a positive impact on the business, with Tesco set to offload non-core assets over the next few years. However, with profit growth of 5% forecast for the current year and 29% expected next year, Tesco could easily outperform the wider index when it comes to earnings growth.
One area in which Tesco is set to offer vast change is with regard to its dividend payout. For example, in the current year it is expected to pay just 0.95p per share in dividends, and this puts it on a dividend yield of just 0.4%. However, with profits set to rise next year, Tesco is due to pay out around 3.7p per share in dividends, which puts it on a much more appealing yield of 1.7%.
And, with there being the potential for even further dividend growth due to the companys turnaround plans, as well as scope for an increase in its payout ratio from the present 9.6%, Tesco could become a relatively appealing income play over the medium term. In turn, this could catalyse investor sentiment and push the companys share price higher especially if, as expected, interest rates remain at a low ebb over the next few years.
Of course, Tesco has always been regarded as a fairly stable company which delivers decent growth at a reasonable price. However, that image has been shattered in recent years as a result of the companys poor performance. And, looking ahead, Tesco could prove to be a different type of company in future, with its beta of 1.45 indicating that it is no longer a relatively defensive company.
In fact, Tescos beta indicates that its shares should (in theory) move by 1.45% for every 1% change in the value of the wider index. This, combined with its strong growth forecasts, indicates that Tesco could be a relatively volatile growth play in future, with there being scope for strong gains but also the potential for larger losses than in the wider index.
With Tesco offering long term potential via a turnaround plan, strong growth potential in the next couple of years, as well as improving dividends, it appears to have upbeat prospects. However, the key reason why its shares appear to offer great value for money as a growth play is its price to earnings growth (PEG) ratio. It currently stands at just 0.6 and indicates that, while Tescos shares may prove to be volatile, they could turn out to be a great buy at the present time, with stunning growth being on offer at a great price.
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