The Tesco share price fell 2% today. But I see it as a winner in 2021/22!

The Tesco share price fell 2% on Wednesday, despite encouraging financial results. But I think it could be a big winner if the economy booms in 2021/22.

| 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.

For many years, I was a big fan of supermarket giant Tesco (LSE: TSCO), especially when ex-boss Sir Terry Leahy was at the helm. Alas, after a series of missteps and mess-ups (including a major accounting scandal), Tesco’s fortunes waned. After peaking above 625p in November 2007, the Tesco share price underwent a long and rocky slide. By late December 2015, it had crashed below 180p. For the past five years, the shares have been range-bound between roughly 190p and 340p. But I see a strong, stable business at the heart of Tesco. What’s more, I think its shares might outperform the wider FTSE 100 index in 2021, for the first time in many years.

The Tesco share price falls 2% after results

On Wednesday morning, Tesco released its preliminary results for 2020/21. Headline sales excluding fuel were up 7.1% to £53.4bn, driven by an 8.8% rise in its core UK and Ireland stores. But revenues at Tesco Bank slumped in the pandemic, falling by £400m (31.2%). Adjusted group operating profit dropped to £1.8bn from £2.5bn in 2019/20 (down 28.1%). This was largely due to £900m of extra costs relating to Covid-19. Clearly, investors were slightly disappointed with Tesco’s full-year numbers, as the share price dip on Wednesday showed.

This giant should bounce back in 2021/22

As I write, the Tesco share price stands at 227.35p, down 4.75p (2.1%) on the day. But I think these results were pretty good, given the huge effort and cost of the firm’s rapid adaptation to social distancing, infection-control measures, and the surge in online shopping. Furthermore, the swing at Tesco Bank to a £175m loss from a £193m profit in 2019/20 shouldn’t be repeated. Indeed, as the economy recovers post-Covid-19, banking profits are expected to soar.

Despite pubs, bars and restaurants being locked down for long periods, sales gains were wiped out by additional costs. Thus, diluted earnings per share (EPS) fell to 11.94p in 2020/21, down 35.8% from 18.6p in 2019/20. But the supermarket reckons only a quarter of these extra costs should continue into 2021/22. If this is the case, then Tesco’s bottom line could see a boost of £675m from lower expenses. This would lift EPS and should help to support the future share price.

What next for Tesco?

For now, the business has decided to hold its cash dividend at the 2019/20 payment of 9.15p per share. Based on the current Tesco share price of 227.35p, this equates to a dividend yield of 4% a year. But, given the strength of the group’s balance sheet (net debt fell by 2.8% to £12bn), I see scope for future dividend hikes. Again, this — or share buybacks — could given the shares a long-awaited boost.

Likewise, if the UK enjoys a sustained, multi-year economic boom after Covid-19 is under control, then this should spell good news for Tesco’s earnings. Conversely, company profits could suffer if more infectious variants of Covid-19 emerge, postponing the global partying. Also, Tesco’s sales could decline if pubs, bars and restaurants boom after reopening. And let’s not forget the inexorable march of discounters Aldi and Lidl. 

Still, with Tesco gaining momentum, I see potential for higher returns for shareholders. That’s why I see the Tesco share price as a winner in 2021/22. Hence, I’d happily buy these shares today.

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.

Cliffdarcy has no position in any of the shares mentioned. 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

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

To build a passive income flow, I’d follow this Warren Buffett approach

Warren Buffett has set up passive income streams most people can only dream about. Our writer sees some practical lessons…

Read more »

Growth Shares

As the boohoo share price falls, could it become a penny stock in 2025?

Jon Smith outlines some of the recent problems involving the boohoo share price and considers if things could get even…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Here are the worst-performing FTSE 100 shares over the last 5 years

These five FTSE 100 shares have been complete duds over the last half decade. But is there potential for a…

Read more »

Investing Articles

Nvidia stock has tripled this year! Can it keep rising?

Nvidia's latest sales update showed strong growth and the stock's been on a tear so far in 2024. So is…

Read more »