Tesco Drops Below 3 Pounds

LONDON -- Until the 80s, Tesco (OTC: TSCDY) was just another British supermarket fighting for shoppers' cash.

Tougher times for Tesco
In the 90s, under the command of new chief executive and retail genius Sir Terry Leahy, Tesco began pulling away from the pack. Today, Tesco has a dominant U.K. market share of 30.8%, which is almost as much as those of Asda (17.4%) and J Sainsbury (16.5%) combined.

However, Tesco has had a bad 2012, with strong results abroad tarnished by weak growth in its home market, which accounts for nearly two-thirds of sales. As a result, Tesco shares have dived this year.

Five reasons to consider Tesco
As I write, they trade at 297 pence, having slipped through the psychologically important 3 pound mark earlier this morning. Here are five reasons why Tesco could be a bargain buy:

1. Market dominance: Investment guru Warren Buffett -- the world's third-richest man -- looks to invest in companies with strong market dominance and wide competitive moats around their businesses. For me, Tesco looks exactly the kind of firm that the Oracle of Omaha buys. After all, with worldwide sales above 72 billion pounds, Tesco is the U.K.'s grocery juggernaut.

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2. FTSE 100 giant: At 297 pence a share, Tesco's current market value is nearly 24 billion pounds, making it the 20th-largest firm in the blue-chip FTSE 100 index. As a result of being one of Britain's corporate elite, Tesco's shares are incredibly liquid, so they are easy to buy and sell, even in large quantities. Also, as one of Britain's biggest brands, Tesco is widely held by leading fund managers.

3. A delightful dividend: Right now, you can buy Tesco shares, sit back, and bank a forward dividend yield of 5.1%, covered a healthy 2.3 times. With the Bank of England's base rate stuck at a lifetime low of 0.5% a year since March 2009, this is a delicious yearly cash return for income-seekers and dividend fans.

4. Single-digit P/E: What's more, their recent "Big Price Drop" means that Tesco shares are rated at just 8.6 times forward earnings. Rarely do investors get the opportunity to buy corporate powerhouses on such low ratings. To me, Tesco's earnings yield of 11.6% (the reciprocal of the price-to-earnings ratio) is a sure sign that investors should fill their boots.

5. Growing sales: Although Tesco has had a few setbacks in the U.K., its sales keep growing. In fact, in the year ending Feb. 25, total sales were up by 7% (and ahead 11% in fast-growing Asia).

In April, I weighed up Tesco based on 10 indicators, giving it a thumbs-up at 329 pence. With its shares now 10% cheaper in the recent market slump, the company appears even more attractive today.

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Further investment opportunities:

Cliff does not own any of the shares mentioned in this article. The Motley Fool owns shares of Tesco. Motley Fool newsletter services have recommended buying shares of Tesco. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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