If you have £1,000 to invest, I don’t know where to start. Today, I’m going to explain why I believe Tesco (LSE: TSCO) could be the best place to invest your money for 2019.
I’m also going to highlight why I think shares in the company have the potential to smash the UK’s leading blue-chip index, the FTSE 100 this year.
Uncertainty prevails
Right now, the UK’s economic outlook is dominated by uncertainty. With no Brexit deal agreed, and time on the clock rapidly running out, it’s just impossible to tell today how the economy will look six or even 12 months from now.
With that in mind, I’m of the opinion that investors should be focusing on defensive stocks, companies that will continue to see strong demand for their goods and services no matter what happens at the end of March.
This is why I like Tesco. Even in the worst case scenario, it’s highly improbable people will stop eating. Consumers might cut back on spending, but this could actually be good news for Tesco as shoppers shun expensive branded products in favour of the group’s own-label offering.
However, as I covered recently, it’s supply, rather than demand, disruption that will be a threat to the group’s operations after Brexit. Indeed, supply network disruption is the most commonly cited No Deal risk, and this seems to be where most planners are concentrating their efforts.
Tesco has said that it’s doing everything it can to avoid disruption, including stockpiling tinned and canned products as well as renting extra freezers to increase the storage of frozen goods. And I think Tesco will be better prepared for the worst-case scenario than most, because this business is a finely-tuned logistical machine.
The group has spent decades building a global distribution network to get products to consumers in the shortest time frame and at the lowest cost. Brexit might disrupt some of its operations, but Tesco can use its decades of experience in managing its logistical network to minimise disruption, and I reckon this is the most likely outcome for the firm.
Margin growth
So, overall, no matter what happens at the end of March, I think Tesco will continue to prosper and push forward with its goals to achieve an operating margin of 3.5-4% by the end of February 2020.
If the company can meet this target, City analysts believe the group’s earnings per share will increase 53% over the next two financial years, which makes the business one of the fastest growing in the FTSE 100.
Progress report
I’m expecting the company to report substantial progress towards its margin goal when it unveils its fiscal 2019 results later this year. And when it does, I reckon the stock could see a sudden re-rating as investors buy back into the Tesco growth story.
On top of this, analysts are expecting the group to announce a 65% increase in its dividend, taking the annual distribution to just under 5p, giving a dividend yield of 2.2%. This will be the highest dividend from the company in four years and could reignite interest in the business among income investors. That’s just another reason why I think the Tesco share price could crush the FTSE 100 in 2019.
