The largest grocer in the UK, Tesco (LSE: TSCO), recently announced its interim results. It has strengthened the balance sheet and maintained its strong position in the market. The company has more than 6,800 stores and business history of more than a decade. Tesco has a market share of 27%, which is significant when compared to other competitors like Asda or Sainsbury’s who have a share of 15%. Tesco benefits from economies of scale and has remained strong even during a recession. Shopping habits of people remain unchanged even if the market is down, so I believe the stock will be a strong addition to your portfolio.
1. Immense space to grow
Currently, Tesco seems fairly priced at 231.70p. However, I think the stock may look to grow. Tesco has grown at a rate of 20% compared to the 9% growth of FTSE 100 in 2019. The earnings growth is expected to range between 5% and 10% in the coming years while it is expected that the dividend growth will be higher. The price-to-earnings (P/E) ratio is 17.43. The industry P/E ratio is 19.87, and the company is very close to the industry benchmark. Since the P/E is lower than its industry average, there is scope for growth. With a market cap of £23 billion, the stock has a good basis to grow from. Tesco shares can offer a margin of safety, which I believe makes them appealing for investors.
2. Dividend payout
Income investors are concerned about the dividend paid by a company. During the last year, Tesco paid 50% of its profits in the form of dividends, which is a very healthy payout ratio. It paid 69% of its free cash flow, which shows the amount of cash the company owns. It is also a sign that the dividend is sustainable and the company should continue to pay for the coming years. The interim dividend issued by the company for the year is 2.65p and it is 59% higher than that of last year.
3. Strong fundamentals
Tesco’s latest trading update showed fair numbers, with the company meeting the profit margin target between 3% to 4% ahead of schedule. The profit margins for the last year was 3.7% and for the last half-year was 4.4%. Earnings per share (EPS) has increased by 50% and dividends were up by 60%. Looking at the income statement of the company, the group operating profit has increased 25% and the EPS has increased by 49%. It has a strong retail free cash flow of £814m while the net debt has declined 7.8%.
With the holiday season approaching, Tesco can expect high sales and revenue. The grocer has a strong market hold and the shares have done quite well so far this year. Tesco looks like a good bet to me at this point in time.
