You are here: Home - Investing - Experienced Investor - News -

Buxton eyes Tesco ‘value opportunity’ after contrarians move in

Written by:
Old Mutual Global Investors' Richard Buxton is considering buying Tesco for the first time in four years, as managers investigate a contrarian opportunity in the stock despite the spectre of dividend cuts.

The share price of Britain’s largest supermarket has tumbled 25 per cent year to date, shedding 3.3 per cent this month, as it struggles against increasing competition from low-cost rivals.

The firm announced the departure of CEO Phil Clarke last month following another profit warning, and currently trades on a trailing PE of just 10 times earnings, with a dividend yield of almost 6 per cent.

However, the sustainability of that dividend has been called into question: some analysts predict a halving of Tesco’s payout when it reports interim results on 1 October.

Buxton, speaking this morning, said he is “not jumping in just yet” but said he is stress testing the impact of potential price cuts across the business, adding he is “very much alive to the potential opportunity.”

The manager of the £1.5bn Old Mutual UK Alpha fund, who has not owned the stock since 2010, acknowledged a dividend cut may be on the cards when new chief executive David Lewis arrives from Unilever next month.

“It will be an option open to the new chief executive. You can come up with scenarios where they can maintain the dividend payment, though obviously [dividend] cover is going to fall rather significantly.”

Value trap or buying opportunity?

Sentiment on the stock remains deeply negative after a string of disappointing earnings reports, while managers from Neil Woodford to Warren Buffett have sold down stakes in the business.

Jeremy Lang, manager of the Ardevora UK Income fund, has described the stock, which has fallen 42 per cent since the start of 2011, as a “classic value trap”.

Others have gone further: David Urch, manager of the TB EEA UK Equity fund, opened a short in the company last month following the announcement of Clarke’s departure and pointed to its “vulnerable position and unattractive operating environment.”

Urch joins the likes of hedge fund Lansdowne Partners in actively betting against the stock, but others see the falls as a classic contrarian opportunity, where investors seek to profit by going against conventional wisdom.

Investec’s multi-asset team, seeing a similar opportunity, began buying the stock earlier this year.

“The value equity team began to buy Tesco and Morrisons earlier this year, and following this, our own due diligence work has highlighted significant re-rating and growth potential on a two- to three-year view,” Stopford said.

Other well-known managers that still hold Tesco include Schroders’ Kevin Murphy and Nick Kirrage via their £1.5bn Income fund: the stock made up 3.9 per cent of the portfolio as at 30 June.

Majedie’s £2.7bn UK Equity fund, part of a £7.6bn strategy, also has 3.1 per cent in the stock, representing almost their entire exposure to food and drug retailers.

Buxton suggested this morning that he is not alone in taking another look at the supermarket.

“We along with many others in the market are kicking through the numbers, trying to stress test what Tesco could choose to do: more price cutting, taking margins down, and the impact that may have on halting the growth of the discounters.

“Clearly there is a value opportunity here. There is a potential change story. We know the situation is unsustainable, and that has been recognised by the Tesco board.”

Tag Box

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

Everything you wanted to know about ISAs…but were afraid to ask

The new tax year is less than a fortnight away and for ISA savers or investors, it’s hugely important. If yo...

Your right to a refund if travel is affected by train strikes

There have been a wave of train strikes in the past six months, and for anyone travelling today Friday 3 Febru...

Could you save money with a social broadband tariff?

Two-thirds of low-income households are unaware they could be saving on broadband, according to Uswitch.

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

DIY investors: 10 common mistakes to avoid

For those without the help and experience of an adviser, here are 10 common DIY investor mistakes to avoid.

Mortgage down-valuations: Tips to avoid pulling out of a house sale

Down-valuations are on the rise. So, what does it mean for home buyers, and what can you do?

Five tips for surviving a bear market mauling

The S&P 500 has slipped into bear market territory and for UK investors, the FTSE 250 is also on the edge. Her...

Money Tips of the Week