After going nowhere for several years, Tesco (LSE: TSCO) shares are now making a move higher. Recently, the share price hit 300p – its highest level since 2014.
Here, I’m going to look at the investment case for Tesco shares today. Should I buy the stock for my portfolio?
3 reasons to buy Tesco shares this year
There are a number of things to like about Tesco shares right now, in my opinion. One is that they’re quite ‘defensive’ in nature.
At the moment, a lot of UK consumers are really struggling due to soaring energy and food prices. As a result, many economists believe we could see a recession in the not-too-distant future.
Tesco shares could potentially provide protection against a recession due to the fact that demand for its products tends to remain pretty stable throughout the economic cycle. In a recession, people still need to eat.
Earlier this week, my colleague Roland Head said Tesco would be one of his top stock picks in a recession. He noted that in the last major UK recession (2008/09), the company’s annual profits and dividend continued to rise.
Moving away from the company’s defensive attributes, another thing I like about the stock right now is its dividend yield. For 2022, analysts expect Tesco to pay out 10.7p in dividends. At the current share price, that equates to a yield of about 3.9%.
That’s a pretty handy yield in the current low-interest-rate environment. And if UK share prices were to fall in the event of a recession, it could provide a hedge.
As for the valuation, it seems reasonable. At present, the forward-looking P/E ratio is about 12.
2 risks to Tesco’s share price
As always though, it’s all about risk versus reward. And I do see a few risks here. My main concern is in relation to rivals stealing market share in the years ahead. This could impact growth (and the share price).
Now, to its credit, Tesco does have a fantastic loyalty scheme. Its Clubcard programme currently boasts over 20m members across the UK. This helps it bring customers back to its stores.
However, if the UK cost-of-living crisis gets worse, I wouldn’t be surprised to see more consumers gravitate towards low-cost discount supermarkets such as Lidl and Aldi.
It’s worth noting here that data from Kantar shows that these two supermarkets were the best-performing grocers over the 12 weeks to 20 March – both increasing their sales by 3.6% year-on-year. As a result, Aldi achieved a record market share of 8.6%, while Lidl matched its record high of 6.4%.
A second concern for me is debt on the balance sheet. At the end of August, Tesco had around £14bn of debt on its books. With interest rates now rising, this debt is going to become more expensive to service. Higher interest payments could eat into profits, and potentially impact growth of the dividend going forward.
Tesco shares: my move now
Weighing everything up, Tesco doesn’t strike me as a strong buy right now. There are things to like about the stock in the current environment. However, all things considered, I think there are better stocks for me to buy today.
