I’ve waited a long time to buy some Tesco (LSE: TSCO) shares for my long-term diversified portfolio. But the conditions were never right. However, all that changed over the past few days. And if I had spare cash, I’d research the opportunity now.
A patchy record
For me, one of the attractions of Tesco has been the potential of the business to deliver steady incoming operating cash flow. But the company’s record isn’t clean regarding that. A few years ago, the business got into trouble and had to turn itself around.
Part of the problem was the ongoing battle for market share between competing supermarket chains in the UK. Another part of the problem was the difficulties it experienced with its expansion programme abroad. One theory is the directors took their eyes of the UK business because they were distracted by the international business.
But there’s been a managed retreat from several overseas operations. In recent years, the company exited Japan, South Korea, the US and Poland, for example. However, it still has operations in Hungary, Slovakia and the Czech Republic. But the slimmed-down international business is likely much easier to control than Tesco’s previous sprawling ’empire’.
Prior to Tesco’s problems, I’d always considered the supermarket sector to be a safe and rather boring place to invest. My theory was that supermarket chains could generate steady and secure streams of cash flow. And that would support a progressive shareholder dividend policy.
However, when Tesco crashed into crisis, the situation proved my theory was wrong. But after the company turned itself around, I became optimistic it could come back. Maybe one day Tesco could once again deliver steady cash flow and consistent dividends to its shareholders.
An attractive valuation
And since 2017, the dividend record has been pretty good. But, for me, the valuation has remained too high — until now. I’ve wanted a decent dividend return from Tesco shares to offset some of the risk. The business, after all, has proved its vulnerability and weakness in recent years. And I’ve said for a long time that I’d refuse to invest unless the dividend yield is at least 5%.
The good news is that my wish has come true. With the share price near 200p, the forward-looking yield is just above 5% for the trading year to February 2023. It looks like the general stock market weakness has created a better-value opportunity with Tesco shares. And that yield above 5% is the one overriding reason I’d consider buying the stock.
But is the business in good health? Back in June, the company delivered a workmanlike first-quarter trading statement and trading had been holding up well in a challenging environment. However, I’m looking forward to reading the half-year report due on 5 October to understand recent progress.
A lower valuation doesn’t remove all the risks from owning shares in Tesco. It’s possible that operational problems could affect the company going forward. And the directors may even cut the dividend. Nevertheless, I’m getting interested in Tesco shares now.
