Tesco (LSE: TSCO) has been popular with investors for decades. Not now though, it seems. But I think I see at least five reasons to buy Tesco shares today.
Price fall
The Tesco share price has fallen 25% over the past 12 months.
A price fall alone is not a good reason to buy shares. But when there’s nothing wrong with the company behind it, it can be. And a company that’s strong enough to withstand short-term economic upsets can be a long-term bargain buy when it’s down. Is Tesco such a company? I think so.
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Big dividends
The share price fall has pushed up the Tesco dividend yield. Forecasts suggest 5.6% for the current year.
If we buy a long-term dividend stock when its price is down and its dividend yield is elevated, that can provide a lifelong benefit. With every share we buy today, we can lock in all future dividend yields, based on the price we pay now.
I don’t know what might happen in the short term. But if Tesco maintains strong dividends for decades, it’s surely good to buy when the shares are low and the yield is high.
Share buybacks
Tesco is continuing its £750m share buyback programme with a new £100m tranche. I like a share buyback for several reasons. It should boost future dividend yields. That’s because the same amount of cash would be spread over fewer shares. It also shows that the company has the cash to spare, lessening my concerns over its long-term health.
A buyback can help support the share price too. But I’m maybe less happy about that, as I’d prefer to buy at an even lower price.
Inflation protection
Inflation pushed above 10% in September. How do investors cope with high inflation? One way is to invest in companies providing essential goods and services, as they’re less likely to be hit by restricted spending.
And what better than the nation’s biggest food retailer? It ties in with Tesco’s underlying strength, and with those dividends. I reckon the best way to deal with inflation is by snagging lower-risk dividends that can beat it in the long term.
Pessimism
Finally, just a reason to buy shares in general now. Famous fund manager Sir John Templeton once said “The time of maximum pessimism is the best time to buy.” Billionaire investor Warren Buffett has famously urged us to be “greedy when others are fearful.“
Are investors fearful? Are we seeing maximum pessimism now? I think it’s a great time to buy shares.
And reasons not to buy
There are reasons not to buy too. Tesco has been forced to cut prices to remain competitive against the likes of Aldi and Lidl. And a recession of any length could keep that pressure on for a lot longer than we’d like. And we could easily see further share price falls over the next couple of years.
Tesco also carries £10bn in net debt. During the Covid crisis, we saw the damage that some debt-laden companies suffered. Might Tesco’s debt be damaging in a recession?
Still, I think the balance is favourable for long-term investors. And Tesco is on my list of candidates (along with quite a few others, mind).
