I was recently reviewing the FTSE 100 by share price. I noticed that the Tesco (LSE: TSCO) share price had been on a great run lately. This provided me with the perfect excuse to revisit what I consider to be a great stock to buy for growth and returns in my portfolio.
Let me explain why I’m bullish on the shares.
Good momentum despite challenges
Tesco shares are up 42% over a 12-month period from 256p at this time last year, to current levels of 366p.
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Despite Tesco’s size, stature, and market dominance, I was a tad surprised the shares had done this well. The recent cocktail of higher inflation and interest rates, as well as the emergence of supermarket disruptors led me to believe the shares may struggle, or become stagnant at worst. Boy was I wrong.
It’s worth noting that these challenges are risks moving forward too. For example, the economic issues have created a cost-of-living crisis. Wallet-conscious consumers are now bargain hunting, and making their cash stretch further. Margins could be squeezed here.
Supermarket disruptors Aldi and Lidl are primed to benefit, with their low-cost, no frills alternatives. In fact, Aldi has already cornered close to 10% of the UK grocery market. I’ll keep an eye on these credible competitors, as they could damage Tesco’s dominance.
Finally, I’ll keep an eye on Tesco’s debt levels. This is primarily because of the higher interest rate environment we find ourselves in. Debt is costlier to service during times of higher rates.
Why I like Tesco shares
Putting my positive hat back on, it’s hard to ignore Tesco’s presence, track record, and dominance in the sector. With roots stretching back 100 years, Tesco knows a thing or two about navigating challenging trading periods. Events during this tenure include world wars, pandemics, and pretty much everything in between. An existing market share of 27% in the UK segment is far ahead of second place Sainsbury’s 15%.
Moving on, Tesco is not resting on brand power and recognition. The business continues to invest and innovate to boost earnings and performance. Two examples are its online grocery offering, which has grown to 40% market share, and its online market place business. This is where consumers can look to buy pretty much anything they desire, a bit like Amazon, but obviously not on that scale just yet.
Finally, from a fundamental view, a dividend yield of 3.5% sweetens the investment case. However, I do understand that dividends are never guaranteed. Plus, the shares trade on a price-to-earnings ratio of 14. This isn’t the cheapest. However, I firmly believe that you get what you pay for. Paying a good price for what I consider a solid company is a no-brainer for me.
Final thoughts
Overall, I think Tesco shares could help boost my holdings and help me build wealth. With attractive fundamentals, an eye on the future, and a great track record to boot, there’s lots to like.
The next time I have some cash to invest, I’d buy some Tesco shares.
