The Motley Fool

Why Warren Buffett Bought Tesco PLC

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.

Imagine you were Warren Buffett. What was the reasoning behind his investment in Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US)? More specifically, why has he invested in Tesco rather than Walmart (NYSE: WMT.US)? Well, this is what he might have been thinking…

In simple terms, he likes to invest in long-term trends. One long-term trend is that people are buying more and more from supermarkets and less from corner shops, the high street and department stores. Why trek over to the high street when all the essentials can be bought during your weekly trip to the supermarket?

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

So the logical conclusion would be to invest in a supermarket. If you are an American investor like Buffett, then the logical choice would be Walmart, which is the dominant — and most profitable — player in the States.

Buying power and agility

But Walmart is already huge ($238bn market cap). How much bigger can it grow, particularly in the States? When a company reaches this size and scale, it is difficult to grow fast. And it is not particularly cheap (P/E ratio of 14, dividend yield of 2.5%).

Compare this with Tesco. This is a smaller company (a mere fifth of the market cap of its US competitor) with more of its sales overseas. The company is big enough to have massive buying power, but it is small enough to still grow rapidly, and to be agile in what can be fast-moving markets.

Plus its presence in many emerging markets is still nascent, so there is still the scope for much more growth. This doesn’t mean that there aren’t bumps along the way. Tesco’s foray to Walmart’s home ground of the States was a clear failure. But I think the company has drawn a simple but key lesson.

The partnership approach

It is not easy to go it alone in markets where there are already entrenched competitors. This, I think, is why Tesco is now seeking out partners and established brands in many of its ventures.

It is expanding into the restaurant business in the UK. But rather than create a brand from scratch, it has bought up the established and successful Giraffe restaurant chain.

To expand in China, rather than plough a lonely furrow it has joined forces with CRE, already a big player in China’s retail business. The concept is simple: rather than trying to build a brand from scratch, which is difficult and rather hit and miss, invest in an already established and successful brand.

Then, just by scaling up these brands, the company builds growth.

Yet, despite Tesco’s greater growth potential, it is actually cheaper than Walmart (P/E ratio of 10, dividend yield of 3.9%). Is this reason enough for Buffett to venture across the Atlantic to buy Tesco? I think so.

What’s more, this comparison of the rival supermarket titans gives us some perspective about whether Tesco is a buy or not. Although the company is not as cheap as when the share price slumped last year, the company is, in my view, a strong buy.

Good long-term investments

Tesco is the type of share that we at the Fool think is a good long-term investment. It’s the sort of company that we expect to grow and steadily increase profits — and thus its share price and dividends — for many years into the future.

We have such confidence in this company that we have made it one of our “5 Shares To Retire On”. Want to learn what other companies we would recommend as long-term investments? Then just click on this link to receive our report, which is provided without obligation and completely free.

> Both Prabhat and The Motley Fool own shares in Tesco.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.