Tesco share price megaphone pattern points to a 16% surge

Tesco share price has bounced back in the last three straight days as investors cheer its recent financial results. After crashing to a multi-month low of 310p on April 10, the index has soared by 11.7% to the current 345p. This article explores whether Tesco is a good investment and whether its dividend is safe.

Tesco share price has rebounded after earnings

Tesco, the biggest retailer in the UK, has done well this week as the market reacted to the recent financial results. 

The numbers showed that the group’s sales rose steadily by about 3.5% to £63.6 billion. This growth happened as it continued to gain market share against other British retailers. Its share has grown in the last 21 consecutive weeks and currently sits at 28.3%.

The adjusted operating profit rose by 10.6% to £3.12 billion, while the adjusted diluted EPS grew by 17% to 27.38p. 

Most importantly, Tesco investors received more dividend payments from the company as the dividend per share rose by 13.2% to 13.70p. This figure has jumped because of its higher profits and its share buyback program. It has repurchased shares worth about £1 billion in the last few years. 

Tesco has committed to boosting its share repurchases by launching a new £1.45 billion program that will end in April next year. Part of these buybacks will come from its free cash flows, while the rest will be from its sale of its banking operations to Barclays.

Read more: Tesco share price could explode higher soon, chart pattern shows

Share repurchases are good because they help a company reduce the number of outstanding shares, boosting the earnings per share (EPS). It also helps to boost confidence in the company and improve ratios like the return on equity and return on assets.

Therefore, Tesco has a combination of a big market share in the UK retail sector, steady growth, a reduced outstanding share count, and a healthy dividend. It has a dividend yield of about 3.7%.

TSCO shares are a bit cheap

A closer look shows that Tesco is cheaper than its global peers. According to Yahoo Finance, the company has a trailing P/E ratio of 14.6, while Simply Wall St puts the figure at 11.5x. 

Tesco has a market cap of over £22 billion and generated an operating profit of £3.12 billion, giving it a price-to-operating profit figure of 7. The P/E ratio is calculated by dividing the stock price by its earnings per share. 

Tesco share price stands at 345p and an earnings per share of 23.5p. Therefore, dividing the two gives a trailing P/E multiple of about 14. This makes it relatively undervalued compared to the retail industry, which stands at about 16x. 

A key reason for this is that competition in the retail sector is heating up, with Aldi accelerating its price cuts.

Tesco stock price technical analysis

TSCO stock chart by TradingView

The weekly chart shows that the Tesco stock price has bounced back as we predicted in our recent forecast. It has remained above the 100-week moving average, a sign that the bulls are holding steady. 

Most importantly, it has formed a giant megaphone chart pattern, comprising of two ascending and widening trendlines. This pattern is one of the most popular bullish signs in the market. 

Tesco stock formed a hammer candlestick pattern, a popular bullish reversal sign. Therefore, the stock’s outlook is bullish, with the next key level to watch will be at 400p, up by 16% above the current level. A drop below the support at 310p will invalidate the bullish forecast.