The Tesco share price is falling. Here’s why I’d buy

The Tesco (LSE: TSCO) share price has tumbled over 4% in early trading. Paul Summers takes a look at its latest full-year results to find out why.

| 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.

The Tesco (LSE: TSCO) share price was firmly in negative territory this morning as the company released its latest set of full-year numbers to the market. Here’s what I think Foolish investors need to know.

“Exceptionally strong” sales

With most of us stuck indoors, it’s unsurprising that Tesco reported that it had seen “exceptionally strong” sales in the year to the end of February. 

Group sales (excluding fuel) rose 7.1% to £53.4bn. No less than £48.8bn of this came from the UK (up 8.8%) with the remainder coming from operations in Europe and Tesco Bank. Predictably, online sales rocketed over the trading period — up 77% to £6.3bn.

Should you invest £1,000 in Petra Diamonds Limited right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Petra Diamonds Limited made the list?

See the 6 stocks

Unfortunately, all this didn’t translate to the bottomline. On a statutory basis, pre-tax profit tumbled by almost 20% to £825m thanks to massive coronavirus-related costs. The move to repay the Government £585m in business rates relief also had an impact. Although not unexpected, this may help explain today’s reaction.

Tesco’s decision to maintain rather than increase the amount of cash it returns to investors, although prudent in my book, may have also annoyed some. Today’s final dividend of 5.95p per share brings the total payout for the year to 9.15p per share (ignoring the special dividend paid in February). Taking into account the Tesco share price as I type, this gives a yield of 4.1%. That’s still more than I could get from the FTSE 100 as a whole (3.1%).

Still a ‘buy’ for me

Of all the listed supermarkets, Tesco has been my firm favourite for a while. Today’s share price reaction won’t change that.

At 27.1% (and despite the rise of the German discounters), the company still has a commanding share of the UK grocery market. In fact, Tesco commented today that it had actually increased its dominance over the last year and gained customers “from all key competitors“.  Factor in its incredibly popular Clubcard scheme and I don’t see Tesco losing its crown anytime soon. 

Another reason for being bullish on the Tesco share price is the company’s outlook. While sales may moderate this year, the £18bn cap does expect “a strong recovery in profitability” as costs relating to the pandemic won’t repeat in FY22. In fact, Tesco now believes retail operating profit might be similar to that seen in 2019/20 financial year.

Reasons to be wary

Of course, this isn’t to say there’s nothing to be wary of. For one, the online part of the business is still loss-making. I don’t see this situation changing radically for a while. Prospective buyers like me also need to be comfortable with the possibility of a third Covid-19 wave and the knock-on effect this could have for Booker, Tesco’s wholesale, hospitality-focused division.

On top of this, the performance of the Tesco share price has been nowhere near as good as other companies in the index, even if we take into account the 15-for-19 share consolidation in February. The FTSE 100 itself is up 19% in one year. Based on this, it may have been less stressful to buy a diversified FTSE 100 tracker and do nothing. 

Created with Highcharts 11.4.3Tesco Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Yet I continue to regard Tesco as a good option for FTSE 100-focused, defensive-minded investors like me. A valuation of 11 times forecast earnings looks reasonable, even if a full share price recovery will take time. I regard today’s fall as an opportunity and would be happy to buy. 

Should you buy Petra Diamonds Limited now?

Don’t make any big decisions yet.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — has revealed 5 Shares for the Future of Energy.

And he believes they could bring spectacular returns over the next decade.

Since the war in Ukraine, nations everywhere are scrambling for energy independence, he says. Meanwhile, they’re hellbent on achieving net zero emissions. No guarantees, but history shows...

When such enormous changes hit a big industry, informed investors can potentially get rich.

So, with his new report, Mark’s aiming to put more investors in this enviable position.

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

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.

Paul Summers 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

Passive income text with pin graph chart on business table
Investing Articles

How £100 a month could turn into £6,500 a year in passive income

With enough time, a 6.5% annual return can turn £100 per month into something that yields £6,500 per year in…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

Is now a good time to start investing in the stock market?

Predicting what the stock market will do in the next few weeks and months is nearly impossible. But over the…

Read more »

Close-up as a woman counts out modern British banknotes.
Investing Articles

£5,000 invested in Legal & General shares 10 years ago would have generated passive income of…

Legal & General shares are one of the highest-yielding in the FTSE 100. How much passive income could have been…

Read more »

Passive income text with pin graph chart on business table
Dividend Shares

3 world-class dividend stocks to consider for passive income

These three stocks could potentially help investors create a stable – and growing – stream of passive income in the…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

Diageo’s share price plunges 43% in 2 years! Time to consider buying the dip?

With sales falling, the Diageo share price is being hit hard. But with the shares now trading near 52-week lows,…

Read more »

Night Takeoff Of The American Space Shuttle
Investing Articles

The GGP share price skyrockets 100%+ in 2025 – Could this be the breakout stock of the year?

With the GGP share price more than doubling in four months, can Greatland Gold continue to thrive throughout the rest…

Read more »

Illustration of flames over a black background
Investing Articles

JD Sports’ share price soars 27% in just 3 weeks – is this the hottest stock to consider buying now?

The JD Sports share price is rising rapidly as management steers the business back on track. Can this upward momentum…

Read more »

Nottingham Giltbrook Exterior
Investing Articles

The Marks and Spencer share price stumbles on a cyberattack! Is it time to panic?

A disruptive cybersecurity breach has brought down Marks & Spencer’s online store, sending the share price tumbling. Should investors be…

Read more »