I’d invest £1k in Tesco shares

This Fool explains why he’d invest £1k in Tesco shares today as the company starts the next stage of growth in its core UK market.

| 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.

If I had £1,000 to invest today, I’d buy Tesco (LSE: TSCO) shares without delay. The reason why I’d focus on this company over all the other stocks listed on the London Stock Exchange is simple. I believe Tesco is the best business in the relatively defensive sector of food retail. 

I also think the company has the potential to become an income champion over the next few years. 

The outlook for Tesco shares

Tesco has come a long way since its accounting scandal in 2014. Since then, its management has completely overhauled the company, refocused the business, and expanded into wholesale. As part of these initiatives, the group exited Thailand and acquired UK wholesaler Booker.

The group returned some of the proceeds from its business sale to shareholders and used the rest to repay debt, strengthening its balance sheet. By acquiring Booker, the company also strengthened its position in the UK food retailing market. Booker supplies thousands of smaller retailers around the UK.  

And now the business looks set to embark on its next stage of growth, which will focus on consolidating the firm’s position in the UK retail market. I think this could have a considerably positive impact on Tesco shares. 

To do this, last year the firm launched its new Clubcard scheme. Copying the model used by US retailer Costco, Clubcard holders can choose to pay a monthly fee and receive money off their shopping under the new system.

There are also benefits for subscribing to Tesco’s mobile business and with Tesco Bank products. 

As well as this scheme, management has been expanding the mobile division and paid £123m to buy the 50.1% stake in Tesco Underwriting from former joint venture partner Ageas UK. This will allow Tesco Bank to provide an end-to-end insurance offer for Tesco shoppers. Previously, the group had relied on a selection of other insurers. 

One-stop-shop

The way I see it, Tesco is creating a one-stop-shop for its customers to buy everything from groceries to financial services and mobile phones. And by doing so, customers can lower their costs. The package of products will also give Tesco more data, which can be used to increase sales.

I think all of these initiatives will help reinforce the firm’s position in the UK grocery market. According to analysts, they could also help the company generate as much as £1.2bn per annum in free cash flow. I think that implies the stock’s dividend could rise substantially as we advance. At the time of writing, Tesco shares offer a dividend yield of 4.4%. 

Of course, Tesco isn’t guaranteed to hit this level of cash generation. Significant risks and challenges include rising costs, which could hurt the company’s profit margins. Another wave of coronavirus may also damage the UK’s economic recovery, hitting demand for certain goods and services. 

Still, despite these risks, I’d invest £1,000 in Tesco shares today based on the reasons I’ve outlined. As the company enters its next stage of growth, I think the outlook for the stock is improving. 

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 owns shares of and has recommended Costco Wholesale. 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 Articles

Rolls-Royce shares just fell 7%. Is it time to buy?

This investor in Rolls-Royce shares takes a look at the FTSE 100 engine maker's trading update to see what caused…

Read more »

Young Black woman looking concerned while in front of her laptop
Investing Articles

What’s going on with the Auto Trader share price?

Paul Summers takes a closer look at why the Auto Trader share price has tumbled despite the company posting higher…

Read more »

Investing Articles

Legal & General shares look set to give me a mind-blowing 10.22% yield in 2026!

Harvey Jones is getting a brilliant second income from his Legal & General shares and expects even more to come.…

Read more »

Investing Articles

I’d consider this beaten-down FTSE 100 dividend stock to target a second income of £19,000

Our writer sees an opportunity to earn a substantial second income by investing in this UK insurance giant. Here’s his…

Read more »

Investing Articles

How cheap is the 72p Vodafone share price?

The Vodafone share price looks very cheap having fallen to a 72p price tag. But is it really the bargain…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Up 43% in a year and the IAG share price could keep on rising!

One of the FTSE 100’s highest-flying stocks still looks cheap on an earnings basis. Is this a brilliant buy for…

Read more »

Stack of British pound coins falling on list of share prices
Investing Articles

As the BT share price slumps on H1 results, should I buy for big dividends?

Just when I thought the BT Group share price could be set for a new bullish run, the telecoms giant…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

After H1 earnings, is the Wizz Air share price set for a comeback?

With passenger numbers starting to improve, could the airline’s latest trading update mark the start of a turnaround for the…

Read more »