The Tesco share price is rising! Should I buy the stock now?

The Tesco share price has outperformed the FTSE 100 over the past 12 months and it looks as if this may continue as its recovery advances.

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The Tesco (LSE: TSCO) share price has been rising. Over the past six months, shares in the supermarket giant have increased in value by around 8%, excluding dividends.

Over the past 12 months, the stock hasn’t registered a positive performance, however. Yet with ‘only’ a loss of around 5% since the beginning of February 2020, the company has outperformed the wider FTSE 100, which has declined by approximately 12%, excluding dividends. I think there are a couple of reasons why the retailer has outperformed the broader market over the past 12 months.

Business tailwinds 

First of all, it’s been able to keep its stores open when many other retailers have been forced to close. Throughout the pandemic, so-called essential retailers have been given preferential treatment. That’s helped companies like Tesco avoid the worst of the storm. Indeed, the group reported total like-for-like sales growth of 8.5% at its UK business for the 22 weeks to 9 January

But I don’t think that’s the only reason why the Tesco share price has outperformed over the past 12 months. The group has also continued to make significant progress in its restructuring, which was launched around five years ago. The latest development is the sale of its Asian business. This will provide a multi-billion pound dividend for the company and its investors.

Investors will vote this week on the return of £5bn of capital from the sale. This will constitute a special dividend of 50.93p per share. The group is also devoting several billion pounds worth of profits from the sale to reducing its debt and pension obligations. 

Tesco share price recovery 

When the company has finished shifting its money around, it will emerge as a leaner, UK-focused supermarket retailer with a strong balance sheet. I think these qualities are incredibly desirable. As such, I am considering buying the Tesco share price right now.

As we’ve seen over the past 12 months, supermarkets can be incredibly defensive investments in times of economic upheaval. The outlook for the UK and global economy right now is highly uncertain.

Therefore, I believe Tesco is an excellent investment for the current environment. As well as the special dividend the company is preparing to pay out in the next few weeks, it also offers a regular distribution. The standard payout may hit 7.5p per share for 2021. That suggests a potential dividend yield of 3% on the current share price, although this is just a forecast at present. 

Just because Tesco appears to be a defensive investment, doesn’t mean it will continue to produce positive returns. The company is always facing a different challenge. It hasn’t always managed to navigate these challenges effectively. For example, it has been struggling to fight off the threat from the German discounters for the past five years.

The group has also struggled to recover from its accounting scandal, which began in 2014. Rising labour costs and changing consumer habits may be other challenges the business has to face in the future. A potential windfall tax on companies that have prospered in the pandemic may also hurt its bottom line. 

Still, despite these risks, I think the Tesco share price has plenty of attractive qualities. That’s why I’d buy the shares for my portfolio. 

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.

Rupert Hargreaves owns no share 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.

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