I think Tesco (LSE: TSCO) shares look like a good buy today. The grocery giant may not be the whizziest stock, but it has a key role to play in a balanced portfolio of UK shares, because its dividend is one of the best around.
Tesco did us proud in the pandemic, and its shares escaped the Covid crash as a result. So how will it do as lockdowns ease and shoppers venture back to its stores?
Sales in physical supermarkets rose 3% in the four weeks to 24 April, according to latest NielsenIQ data. That sounds like good news, but there is a sting in the tail, as online grocery sales growth slowed to 25%, down from 92% a year month earlier.
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Here’s another stinger. Aldi and Lidl saw the biggest jump in sales, up 10% and 18% respectively. You might expect that, but Asda and Sainsbury’s also beat Tesco, whose market share dipped from 26.9% to 26.4%.
That’s just one month’s figures, and doesn’t worry me too much. In fact, I have been impressed at how Tesco has managed to hold on to its leadership position. That gives me confidence in buying its shares today.
One concern is that Amazon could take a major bite out of the supermarkets sector, hitting Tesco shares. The online retailing giant recently opened its third UK grocery store.
Another worry is that other sectors may benefit more from the end of lockdown. I suspect people will splurge their pent-up savings in bars and restaurants, rather than going wild in supermarket aisles. Post-lockdown life may also hit Tesco’s food and drinks sales. On the other hand, health and beauty sales should rise, as we smarten ourselves up.
The main attraction of adding Tesco shares to my portfolio is the dividend. Right now, it offers a forecast 4.1% yield, nicely covered 1.9 times by earnings. Unlike many FTSE 100 shares, Tesco continued making shareholder payouts right through the pandemic.
I’d buy Tesco shares for the long term
The downside of buying Tesco shares is that I cannot expect that much growth. The stock is up 41% over five years, but has gone nowhere fast over the last three. Trading at 18.9 times earnings, it isn’t what I’d call dirt cheap, either. Despite that, I believe Tesco shares are a buy.
With the base rate at 0.1%, that dividend yield looks attractive to me, despite chief executive Ken Murphy’s decision to freeze it this year. Tesco also incurred costs in the pandemic as it kept staff and shoppers safe, but these will now fall away, lifting future profits (and investor sentiment).
Investors may be feeling a bit flat about Tesco shares, but I think this makes now a good time to buy them. I see this as a long-term buy-and-hold. The time to invest is when Tesco is out of fashion, rather than in, I feel.
