The Tesco share price fell 2% today. But I see it as a winner in 2021/22!

The Tesco share price fell 2% on Wednesday, despite encouraging financial results. But I think it could be a big winner if the economy booms in 2021/22.

| 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.

For many years, I was a big fan of supermarket giant Tesco (LSE: TSCO), especially when ex-boss Sir Terry Leahy was at the helm. Alas, after a series of missteps and mess-ups (including a major accounting scandal), Tesco’s fortunes waned. After peaking above 625p in November 2007, the Tesco share price underwent a long and rocky slide. By late December 2015, it had crashed below 180p. For the past five years, the shares have been range-bound between roughly 190p and 340p. But I see a strong, stable business at the heart of Tesco. What’s more, I think its shares might outperform the wider FTSE 100 index in 2021, for the first time in many years.

The Tesco share price falls 2% after results

On Wednesday morning, Tesco released its preliminary results for 2020/21. Headline sales excluding fuel were up 7.1% to £53.4bn, driven by an 8.8% rise in its core UK and Ireland stores. But revenues at Tesco Bank slumped in the pandemic, falling by £400m (31.2%). Adjusted group operating profit dropped to £1.8bn from £2.5bn in 2019/20 (down 28.1%). This was largely due to £900m of extra costs relating to Covid-19. Clearly, investors were slightly disappointed with Tesco’s full-year numbers, as the share price dip on Wednesday showed.

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

Click here to claim your copy now!

This giant should bounce back in 2021/22

As I write, the Tesco share price stands at 227.35p, down 4.75p (2.1%) on the day. But I think these results were pretty good, given the huge effort and cost of the firm’s rapid adaptation to social distancing, infection-control measures, and the surge in online shopping. Furthermore, the swing at Tesco Bank to a £175m loss from a £193m profit in 2019/20 shouldn’t be repeated. Indeed, as the economy recovers post-Covid-19, banking profits are expected to soar.

Despite pubs, bars and restaurants being locked down for long periods, sales gains were wiped out by additional costs. Thus, diluted earnings per share (EPS) fell to 11.94p in 2020/21, down 35.8% from 18.6p in 2019/20. But the supermarket reckons only a quarter of these extra costs should continue into 2021/22. If this is the case, then Tesco’s bottom line could see a boost of £675m from lower expenses. This would lift EPS and should help to support the future share price.

What next for Tesco?

For now, the business has decided to hold its cash dividend at the 2019/20 payment of 9.15p per share. Based on the current Tesco share price of 227.35p, this equates to a dividend yield of 4% a year. But, given the strength of the group’s balance sheet (net debt fell by 2.8% to £12bn), I see scope for future dividend hikes. Again, this — or share buybacks — could given the shares a long-awaited boost.

Likewise, if the UK enjoys a sustained, multi-year economic boom after Covid-19 is under control, then this should spell good news for Tesco’s earnings. Conversely, company profits could suffer if more infectious variants of Covid-19 emerge, postponing the global partying. Also, Tesco’s sales could decline if pubs, bars and restaurants boom after reopening. And let’s not forget the inexorable march of discounters Aldi and Lidl. 

Still, with Tesco gaining momentum, I see potential for higher returns for shareholders. That’s why I see the Tesco share price as a winner in 2021/22. Hence, I’d happily buy these shares today.

FREE REPORT: Why this £5 stock could be set to surge

Are you on the lookout for UK growth stocks?

If so, get this FREE no-strings report now.

While it’s available: you'll discover what we think is a top growth stock for the decade ahead.

And the performance of this company really is stunning.

In 2019, it returned £150million to shareholders through buybacks and dividends.

We believe its financial position is about as solid as anything we’ve seen.

  • Since 2016, annual revenues increased 31%
  • In March 2020, one of its senior directors LOADED UP on 25,000 shares – a position worth £90,259
  • Operating cash flow is up 47%. (Even its operating margins are rising every year!)

Quite simply, we believe it’s a fantastic Foolish growth pick.

What’s more, it deserves your attention today.

So please don’t wait another moment.

Get the full details on this £5 stock now – while your report is free.

Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has recommended 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.

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 considered, so you should consider taking independent financial advice.

More on Investing Articles

Young female analyst working at her desk in the office
Investing Articles

Should I buy Amazon shares?

Amazon has a strong web services business and our author thinks its online retail operations are underappreciated. So should he…

Read more »

Young mixed-race woman looking out of the window with a look of consternation on her face
Investing Articles

How I’d invest a Stocks & Shares ISA today for dividend income in the future

Our writer has been investing his Stocks and Shares ISA with the aim of building income streams for the long…

Read more »

Passive and Active: text from letters of the wooden alphabet on a green chalk board
Investing Articles

2 undervalued passive income stocks I’d buy today with £1,000

Falling stock prices are pushing up dividend yields. As a result, our author is looking for undervalued passive income stocks…

Read more »

Close-up of British bank notes
Investing Articles

2 cheap dividend shares I’d buy in a heartbeat

Our writer picks a pair of FTSE 100 dividend shares he would consider for his portfolio, that he thinks look…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

With £500, I’d use the Warren Buffett method to find cheap shares

The legendary investor Warren Buffett has become a billionaire by following some key investment principles. Our writer explains why he…

Read more »

Man in a clothing store in a medical mask because of a coronovirus.
Investing Articles

Down 81%, are boohoo shares set for an explosive comeback?

boohoo shares have been falling rapidly. But could interest from a billion-dollar hedge fund cause a turnaround in 2022?

Read more »

Smartly dressed middle-aged black gentleman working at his desk
Investing Articles

The Tullow Oil (TLW) share price jumps after losses! Is now the time to buy?

The Tullow Oil (TLW) share price ticked upwards on Thursday morning after falling nearly 30% over the last month. So,…

Read more »

Female analyst sat at desk looking at pie charts on paper
Investing Articles

Is the Lloyds share price about to dip below 40p?

The Lloyds share price has been trading below 50p for the better part of the year. But could the stock…

Read more »