This year’s stock market crash has seen most FTSE 100 shares fall sharply. But there are a few companies which have been outperforming the market. One of my top picks is supermarket group Tesco (LSE: TSCO).
The supermarket giant’s share price has fallen by just 8% this year, compared to a 25% drop for the FTSE 100. Unlike many other FTSE shares, Tesco hasn’t cut its dividend. And I believe the outlook for continued growth is stronger than you’d expect.
I reckon that buying a few shares in this FTSE 100 heavyweight today and popping them into your portfolio could help you retire early.
Pandemic performance
We all know from personal experience how the supermarket shopping experience has changed during the coronavirus pandemic. In a recent newspaper interview, Tesco boss Dave Lewis said the firm had the equivalent of five peak Christmas trading days in March, with no opportunity for pre-planning.
The situation has stabilised since then, but demand for home delivery has rocketed. In-store shopping patterns are also said to have changed, with customers doing fewer, bigger shops.
The pandemic was expected to give a big boost to online-only grocers. I think the opposite has happened. Tesco’s big store network and hand-picked online orders means the company has been able to flex its operations to suit changing patterns of demand. The FTSE 100 group’s stores can function both as shops and warehouses for local distribution. It’s hired thousands of extra staff to meet the surge in demand. Sales rose by 30% during the peak weeks of buying.
Compare this to online retailer Ocado. This FTSE 100 share has doubled since the start of 2019, but its high-tech systems and fixed capacity appear to have been overwhelmed by panic buying. On 18 March, Ocado actually shut down its website temporarily.
Growth opportunities
One criticism of Tesco as an investment is that the group is already a very large and mature business, with a UK market share of nearly 30%. But that doesn’t mean this share can’t continue to grow.
The reality is that store-based shopping will still be the norm for most grocery needs. According to Tesco, current constraints on home delivery capacity mean that around 85% of all food shopping must be bought or collected from the store.
Even if this changes over time, Tesco’s store network could still be an advantage. The FTSE 100 group is currently investigating the potential of having automated distribution centres in its larger stores. These would be used to pick stock for home delivery — presumably adding efficiency and requiring fewer staff.
Tesco also benefits from its large convenience store business and the ownership of wholesaler Booker, which supplies non-Tesco convenience stores and restaurants.
This FTSE 100 share looks cheap to me
A couple of years ago I thought Tesco shares look fully priced. Since then, the firm’s profitability has continued to improve, but its share price hasn’t risen. In my view, this FTSE 100 share is now starting to look pretty cheap.
Looking ahead, Tesco stock trades on just 12 times forecast earnings, with an expected dividend yield of more than 4%. In a market where most companies are struggling to predict their performance for the year ahead, Tesco’s stable grocery sales seem pretty attractive to me. I’d be a buyer here.
