The Tesco share price: is a buyout on the cards?

The Tesco share price has risen 15% in less than three months. Here’s why Charles Archer believes it might be a good defensive addition to his portfolio.

| 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.

The Tesco (LSE: TSCO) share price is looking like a great defensive play to me right now. At 256p today, it’s risen 15% over its price of 223p on 1 July. That’s not a bad return in less than three months. 

For the wary investor, it’s worth mentioning that the 30% fall in February was the result of a special dividend paid out from the sales of its Asian businesses. As £5bn was returned to investors, the Tesco share price fell by roughly the same amount.

But market analysts expect revenue to increase by over 150% in this fiscal year. So I think it’s now looking undervalued.

Every little helps

First off, Tesco holds 27% of the UK market share, making it the largest grocer in the UK. It’s also the third-largest retailer in the world when measured by gross revenue. With such a strong position, I think the company is a safe bet as a defensive stock. And it boasts a respectable 3.9% dividend, higher than the FTSE 100 average. 

It’s true that its market share has been eaten away recently by the likes of Aldi and Lidl. But Tesco has benefitted over the past two years from a strong demand for online delivery. In fact, it reported a 13% increase in like-for-like sales in Q1, making it the market leader in online groceries as well. And it’s also trialing zero-waste stores, as part of an ongoing commitment to reduce plastic waste. I suspect this could appeal in the long-term to environmentally conscious consumers.

I’d also buy the shares for the possibility of a private equity buyout. Its former CEO, Sir Terry Leahy, is the advisor for Clayton, Dubilier & Rice (CD&R), the private equity firm currently in the midst of a takeover battle for Morrisons. Yes, it would cost more than its smaller rival. But the Morrisons bidding war has shown that UK supermarket shares may be significantly undervalued. 

Risky business for the Tesco share price

With a lorry driver shortage of at least 100,000, there’s the possibility that Tesco shoppers will once again experience the empty shelves that caused panic in the early days of the pandemic. The grocer has already introduced £1,000 starting bonuses for new drivers. And shortages are likely to be compounded by increased border bureaucracy as a result of Brexit. If the lorry driver deficit isn’t resolved, Chairman John Allan has predicted that “there may be some shortages at Christmas,” the most important trading time of the year. 

And I think in the long-term that Tesco is going to be forced to offer higher wages, to attract staff amid the wider labour shortage. This means that either profit margins will fall, or prices are going to rise. If our fragile economic recovery hits a wave, it’s also reasonable to assume that customers will be less likely to splash out on higher margin premium goods.

However, I’d still buy the Tesco share price. Its defensive nature as a food retailer appeals to me as an investor who believes a market crash may be imminent. A possible buyout is just the icing on the cake.

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.

Charles Archer has no position in any of the shares mentioned. The Motley Fool UK has recommended Morrisons and 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

Investing Articles

Up 26%, can the BT share price really push higher still?

The BT share price has surged on several catalysts in 2024, but there’s evidence to suggest that the stock could…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

What are the best dividend shares to buy right now?

As shares in B&M European Value Retail have fallen, the dividend yield has reached a 10-year high. Should investors be…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

My favourite FTSE 100 passive income stock that keeps the Christmas coffers full

The holiday season is expensive and can leave many consumers struggling to make ends meet. Here’s how I use a…

Read more »

Investing Articles

The latest growth forecasts suggest the Glencore share price will hit 555p!

Harvey Jones has been disappointed by the performance of the Glencore share price since he bought the commodity stock last…

Read more »

Dividend Shares

A closer look at the 11% dividend yield forecast for Phoenix Group shares

Phoenix Group shares have one of the highest dividend yields in the FTSE 100 index today. Could this be a…

Read more »

Investing Articles

If I’d put £25,000 into the FTSE 350 at the start of 2024, here’s how much I’d have today!

Many FTSE shares have rebounded this year as interest rates look set to keep heading lower and market appetite for…

Read more »

Investing Articles

Up 40%, but experts forecast the easyJet share price could soon hit 664p! Time to buy?

The easyJet share price has been flying lately and stock analysts are predicting more fun to come. But there's only…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

Worried about tax raids? Here’s how I’m targeting a £44,526 passive income with shares

Investing in a Self-Invested Personal Pension (SIPP) or Individual Savings Account (ISA) can supercharge one's passive income, says Royston Wild.

Read more »