Over the past 12 months, the Tesco (LSE: TSCO) share price has climbed 18%. For context, the FTSE 100 has fallen 2% over the same period, meaning that the grocery retailer has outperformed the UK market by a whopping 20%.
Given the current choppy macroeconomic climate, I think Tesco shares could be a great defensive addition to my portfolio. Let’s take a closer look at why.
Defensive play
So, what is a defensive stock? A defensive stock is an investment typically found in industries like utilities or consumer staples, known for providing consistent dividends and stable performance even during economic downturns.
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Tesco is the UK’s leading supermarket chain, meaning it fits this bill perfectly. With most economic outlooks remaining uncertain for the foreseeable future, this could provide my portfolio with some great stability.
Enticing valuation
Tesco shares currently trade on a price-to-earnings ratio (P/E) of 15. For context, the FTSE 100 average hovers around 14, and most good value stocks tend to trade around 10. Given Tesco’s strong reputation and industry presence, I am comfortable with the current valuation.
The stock also offers a comfortable dividend yield of 3.7%. This is not the highest in the FTSE 100 by any means, but it does offer the scope for some passive income generation – something I’ll never say no to.
What’s more, according to current analyst projections, Tesco is expected to distribute 11.6p per share for FY2024 and increase it to 12.9p per share for FY2025. Based on today’s share price at 292p, these payouts correspond to yields of 4.0% and 4.4% respectively.
Tesco has also completed a series of share buybacks since 2021, totalling over £1.8bn. This is great for investors, as fewer shares means that dividends are shared by a smaller pool of investors. This means higher yields for Tesco holders.
Not all plain sailing
One headwind I see for Tesco is the escalating competition from budget supermarkets like Aldi and Lidl. These stores have seen a surge in popularity in the UK in recent times, catalysed by the current cost-of-living challenges.
Aldi’s growth has been substantial, winning over one million new customers last year. It also has plans to expand with 500 more stores after reaching its 1,000th in the UK in 2023. Should this growth persist, it poses a substantial threat to Tesco’s market share.
Although UK inflation has started to ease, I expect it will be some time before we see this filter down into lower prices of everyday goods. Tesco will have to work hard to keep its prices down in the face of its cheaper counterparts.
Can the price rise further?
So, with all things considered, do I think the Tesco share price can rise higher in 2024? Absolutely, given its defensive nature and bullish analyst estimates. If I had the spare cash, I would be investing today.
