Is the Tesco share price a FTSE 100 opportunity or one to avoid?

Jabran Khan explores whether the falling Tesco share price is a FTSE 100 opportunity at current levels or one to avoid.

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I believe Tesco (LSE:TSCO) has represented a safe investment in the past, even during the market crash. Since the turn of the year, the Tesco share price has lost over 20% of its value. With that in mind, I want to know whether the FTSE 100 incumbent is currently a good opportunity or one to avoid.

Tesco share price activity

Like many FTSE 100 firms, the Tesco share price has not returned to pre-crash levels. It did experience a spike briefly but since January 2021 has declined once more. There are a few reasons behind this but more on that later.

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As I write this, the Tesco share price is trading for 223p per share. Days prior to the market crash, I could buy shares for over 320p per share. The market crash affected most firms on the FTSE 100 index. Since that time, Tesco’s price has staged a mini revival and by the end of January was trading for over 310p per share.

Special dividends, share consolidation & a trading update

A trading update released last week could also be behind to the falling Tesco share price. I think a special dividend in February and share consolidation affected its price more so. Here’s how and why.

Tesco decided to return almost £5bn to its investors back in February via a special dividend of 50.93p per share. It also involved a consolidation of its share capital. The payout and consolidation came on the back of the sale of its operations in Thailand and Malaysia last year. As a result of this payout, Tesco also decided to consolidate its share capital. It used a 15-for-19 share consolidation. This means it issued 15 new ordinary shares for every 19 existing ones. For example, an investor with 100 existing shares now find themselves owning 78 new ones. A share price dip usually occurs when such events happen. 

As for Tesco’s recent trading update, there weren’t many surprises to my eyes. Operating profit fell close to 30% and retail cash flow also fell by the same margin. The Tesco share price could have benefited by its announcement to maintain its dividend.

FTSE 100 opportunity

At current levels, the Tesco share price could be a potential bargain. It has maintained its dividend, a few months after paying out a special dividend. It also used some of the cash from the sale of its Asian operations to pay £2.5bn into its defined benefit pension scheme. This eliminated the funding deficit and removed the need for additional contributions. In turn, this will improve operating profit in future years. Furthermore, it has reduced its debt level in the time of a financial crisis.

I do have some reservations about Tesco. These are mainly linked to competition. Now more than ever, consumers are looking to make their money stretch further. With cut price competitors like Lidl and Aldi gaining market share, the so-called Big Four (of which Tesco is one) have seen revenues and profit affected. This could increase further. Lidl and Aldi do not offer online shopping. This is where Tesco could still benefit. Many consumers shopped online for the first time in the pandemic. They could continue to do this, which would boost Tesco.

Overall, there are risks, as with any FTSE 100 stock, but along with my Foolish colleague, I do think the Tesco share price is an opportunity at this moment.

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Jabran Khan has no position in any 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.

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