Is the Tesco share price a bargain or should I buy this dividend growth stock?
The future prospects for the Tesco(LSE: TSCO) share price may be relatively uncertain. Brexit is causing consumers to become increasingly cautious about their spending levels. This trend could continue as Brexit moves towards its conclusion, and may mean that sales and margin growth become more challenging.
However, the retailer’s share price has fallen recently and may now offer good value for money. Could it be worth buying right now? Or, does a smaller dividend growth share which released positive news on Thursday offer a stronger outlook?
The company in question is value-added logistics solutions and e-fulfilment and returns management services specialist Clipper Logistics(LSE: CLG). The company released interim results which showed a rise in revenue of 14.1% to £227.9m. Operating profit was 16.1% up on the same period of the previous year at £10.7m, with its e-fulfilment and returns management segments performing especially well.
The company believes that it is well-placed to benefit from a continuing migration of shoppers to online retailing, with click-and-collect’s increasing popularity potentially offering a catalyst for its future performance.
Recent contract wins could provide momentum as the business moves into the second half of the year. Clipper Logistics is forecast to post a rise in earnings of 22% in the current year, followed by further growth of 14% next year. Despite a strong earnings growth outlook, it trades on a price-to-earnings growth (PEG) ratio of 1.3, which suggests that it may offer good value for money.
Dividend growth looks set to continue after it has raised shareholder payouts by 20% per annum over the last three years. Dividends are due to rise by 15% per annum over the next two years, which could boost its 3.4% yield.
As mentioned, the outlook for UK-focused retailers such as Tesco could become increasingly challenging. The general consensus among consumers seems to be that Brexit could cause a period of disruption and uncertainty, and they are therefore adapting their spending in response to this. Consumer confidence is at a relatively low ebb, and is due to remain weak over the coming months.
At the same time, the company faces increasing competition from discount stores. This could put further pressure on sales and margin growth. And with a gradual transition of shoppers towards online options, margins may experience slower growth than the market has been anticipating.
Despite these risks, the Tesco share price could prove to be relatively appealing at the present time. Investors appear to have factored in the risks facing the business, with its valuation declining by over 20% in the last six months. It now has a PEG ratio of just 0.8, which suggests that it offers growth at a reasonable price. Having turned around its performance in recent years and surprised many investors in doing so, the company could be a better investment than the stock market is currently anticipating over the long run.
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Peter Stephens owns shares of Tesco. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.