Should I buy Tesco shares now?

Although Tesco shares will never shoot the lights out they do offer me both dividend income and some potential capital growth.

| 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.

Tesco (LSE: TSCO) shares have had a solid pandemic, by and large. Not fantastic, or amazing, but solid. They trade at roughly the same level they did one year ago, just before the nightmare began. By comparison, the FTSE 100 as a whole is down around 14%.

Shares in Tesco have also beaten the index measured over five years, and rather easily. Its stock is up more than 50% in that time, while the FTSE 100 grew just 12%. Past performance is no guide to future returns, but this is still impressive, given the troubles that affected the UK’s largest grocery chain before Dave Lewis took the helm in 2014.

Many investors now buy Tesco for dividend income, rather than share price growth. This happens when big blue-chips get to a certain size. Getting bigger gets harder. Previously, management tried to get round this by conquering the world, but that strategy came to grief in the US and Asia. So now it depends primarily on the hard-pressed British consumer for growth.

Still the UK’s top grocer

Tesco and the other supermarkets deserve plaudits for feeding the country, keeping shelves stacked and deterring panic-buying. That doesn’t automatically make them good investments, though. So before deciding whether to buy Tesco shares, I’ll put that aside and look at the fundamentals.

Tesco is still the UK’s largest supermarket, by a long chalk. It has market share of 27.3%, according to latest Kantar research, well ahead of second-placed Sainsbury’s at 15.3%. Better still, Aldi and Lidl’s breakneck growth has flattened over the last 18 months, although they remain a major threat to the dominance of the UK’s ‘big four’.

New boss Ken Murphy has inherited a well-run company, in contrast to the chaos Dave Lewis had to sort out. The group had a good Christmas, with online sales up 80% year-on-year. The trend is set to continue and as a leader in the field, Tesco should capitalise on this. Lidl still does not do home delivery, although Aldi does.

I’d buy Tesco shares today

Tesco’s ‘finest’ range of premium own-brand products is also growing strongly, which suggests to me that that consumers are still willing (and able) to pay a little extra to treat themselves. One concern I have is that Tesco’s sales will fall once the lockdowns are finally over, as people buy more food and drink in pubs and restaurants, hitting its shares.

Tesco shares are not exactly expensive today, trading at 12.5 times forward earnings. It also pays a rather good dividend of 4%, covered 1.9 times by earnings.

Management plans to use proceeds from its recent disposals in Malaysia and Thailand to fund a £5bn special dividend. But operating margins are thin at 3.9%, and forecast to get even thinner, falling to 3.1%. Sadly I suspect there is little Tesco can do to improve them substantially, given tough competition in the grocery sector.

The big long-term worry is whether Amazon will steam into food home deliveries and create havoc with established players. Investors have been fretting about this for years, and the big day has yet to come. I think Tesco has the size and scale to fight back, though, and would buy its shares for long-term income and with luck, a little share price growth too.

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.

Harvey Jones 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

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

10% dividend growth! 2 FTSE 100 stocks tipped to supercharge cash payouts

These FTSE 100 stocks have strong records of dividend growth. And they're expected to keep on delivering, as Royston Wild…

Read more »

Investing Articles

Down 17% in a month and yielding 7.39%! Is this FTSE 100 share a screaming buy for me?

When Harvey Jones bought Taylor Wimpey last year he thought this FTSE 100 share was a brilliant long-term buy-and-hold. Has…

Read more »

Investing Articles

Here’s how I’m using a £20k ISA to target £11k+ in income 30 years from now

Is it realistic to put £20k in an ISA now and earn over half that amount every year in passive…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

If I could only keep 5 UK stocks from my portfolio I’d save these

Harvey Jones is running through his portfolio of top UK stocks to see which ones he couldn't bear to do…

Read more »

Midnight is celebrated along the River Thames in London with a spectacular and colourful firework display.
Investing Articles

I’m aiming for a million buying unexciting shares!

By investing regularly in long-established, proven and even rather dull businesses, this writer plans to aim for a million. Here's…

Read more »

Investing Articles

3 things to consider before you start investing

Our writer draws on his stock market experience to consider a few vital lessons he would use to start investing…

Read more »

Investing Articles

Will this lesser-known £28bn growth stock be joining the FTSE 100 soon?

As the powers that be plan a reorganisation of Footsie listing rules, this massive under-the-radar growth stock could find its…

Read more »

Investing Articles

Fools wouldn’t touch these 5 FTSE 350 flops with a bargepole – how come I own 3 of them?

Harvey Jones took a chance on three struggling FTSE 350 stocks in the hope that they'd stage a dramatic recovery.…

Read more »