Tesco (LSE:TSCO) shares have been in the news a lot over the past year following the payment of a large special dividend and share consolidation. Yet when I look at the fundamentals surrounding the business model, I’m impressed. Further, the potential benefit that the stock could give me if we see another stock market crash is something I’m keen on. With the FTSE 100 dipping below 7,000 points again late last week, here’s why I’m considering buying the shares at the moment.
Solid demand for the Tesco offering
Tesco is a well-known supermarket, with the largest market share in the UK for this industry. It does have some operations in Central Europe, as well as operating Tesco Bank. Yet these revenue contributors are small in comparison to the core market in the UK and ROI.
During the stock market crash last year, Tesco shares didn’t actually lose much ground. From a level around 325p in late February, the shares dipped to around 275p in March during the crash. This represents a fall of just over 15%. This might seem large, but other stocks saw much larger falls during this period.
The main reason that Tesco shares managed to outperform stocks from other sectors is due to the nature of the products offered. Supermarkets are all about necessities. Food, drink and value clothing are just a few of these. So even during a pandemic, demand for produce from Tesco didn’t dry up. In fact, there were many occasions when I went into a Tesco store during this period and the shelves were empty due to high demand.
Of course, Tesco had operational issues that meant it struggled to keep up with customer demand during this period. But revenue for the 2020/21 financial year was up 6.3%. At the same time, during a period when many firms took on more debt to help cash flow, Tesco actually reduced net debt by 2.8%.
Tesco shares for a defensive play
One risk I need to think about in the short term is the issue of product shortages due to a lack of lorry drivers for transportation. This has been well reported on and could impact Tesco along with other supermarkets this year.
Further, Tesco is not immune to the impact of the pandemic. This remains a risk to buying shares in the company. For example, pandemic costs were estimated to be around £900m last year. These relate to the costs of safeguarding staff and changes in stores. This filtered down to the bottom line, reducing profit versus the previous year. Yet the key point here is that most of these costs should fade away.
By contrast, some other companies that have seen a hit from the pandemic might not recover as quickly. Rather than more one-time costs, other companies are seeing falling demand contributing to lower revenue that could be here to stay for longer. Yet with Tesco, the demand element should remain strong, even if we see another stock market crash driven by higher Covid-19 or economic recovery concerns.
On that basis, I think Tesco shares could be a good buy for my portfolio to help protect me in case we see another stock market crash this winter. I’m considering buying some shares at the moment.
