2 reasons why I’d buy Tesco for my ISA at the current share price

The Tesco share price looks like a good defensive buy for these uncertain times, says Roland Head.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I’m a huge fan of the UK’s ISA system, which allows us to save or invest up to £20,000 tax-free each year. That means no capital gains tax on future profits, and no income tax on interest or dividend payments.

My investing strategy is to add stocks to my ISA that can provide long-term income growth. Right now, I’m looking for shares that will be reliable performers even if the economy does start to slow.

In this article I’ll explain why I’d buy Tesco (LSE: TSCO) shares today for my ISA. I also plan to look at a smaller stock which I think could be a similar long-term defensive winner.

1. A proven winner

Tesco is by far the biggest supermarket in the UK, with a market share of 27%, versus about 15% each for second-place Sainsbury’s and Asda.

Tesco is also the most profitable of the UK’s listed supermarkets. I think this is at least partly due to the economies of scale that result from its size.

Supermarkets are generally seen as a defensive investment. Even during recessions, people’s shopping habits tend to remain relatively unchanged. I think it’s worth having at least a few defensive stocks in your portfolio, to help smooth out the more volatile performance of cyclical businesses.

During his five years in charge, chief executive Dave Lewis has cut debt and returned the business to growth. Mr Lewis is leaving next year, but I expect his replacement, Ken Murphy to deliver continued progress and a rising dividend.

2. The price is right

The Tesco share price has risen by 23% so far in 2019. The shares may no longer be an outright bargain, but I don’t think they’re overpriced.

Earnings growth is expected to run at between 5% and 10% over the next couple of years, while dividend growth is expected to be higher. Against this outlook, I think the stock’s valuation on 14 times 2019/20 earnings looks reasonable.

Although Tesco’s dividend yield of 3.4% is below the FTSE 100 average of 4.5%, I expect the payout to continue rising. In my view, the shares make good sense as a defensive long-term income buy.

What about growth?

I don’t think Tesco is likely to get all that much bigger than it is already. But I have identified one sector that seems to have defensive characteristics and strong growth potential.

Self-storage has proved increasingly popular in towns and cities as more people rent or live in shared accommodation. Growth in this sector has been strong for a number of years, but results from upcoming firm Lok’n Store Group (LSE: LOK) suggest to me that there’s plenty of gas left in the tank.

Another 40%?

In numbers released today, Lok’n Store said that its sales rose by 10.3% to £17m last year, while underlying operating profit rose by 11.1% to £5.1m. Importantly, the group improved both its occupancy levels (+6%) and unit pricing (+0.6%).

Five new stores were opened during the year to 31 July and the firm has a pipeline of 14 stores. As these stores are opened, they will increase the group’s current estate by more than 40%, to 48 stores.

The UK self-storage market is highly fragmented. Professional operators like Lok’n Store are aiming to modernise and consolidate the industry. Although LOK shares trade at a premium to book value and yield just 2.1%, I believe they remain a decent buy for growth.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. 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.

More on Investing Articles

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »

Investing Articles

2 FTSE dividend shares yielding more than 6% with P/Es of less than 9!

Harvey Jones picks out two brilliant FTSE 100 dividend shares that yield more than 6% but are selling at strangely…

Read more »