Are Tesco shares a good choice for my pension?

Our writer weighs some of the pros and cons of Tesco shares as a possible addition to his pension portfolio.

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When it comes to pensions, a lot of investors look for shares that have long-term growth prospects and the possibility of dividend income far into the future. One share I think could fit those criteria is supermarket chain Tesco (LSE: TSCO). But is buying Tesco shares a smart move for my pension?

Tesco shares and growth prospects

One of the reasons many investors like supermarket businesses is because they are seen as highly defensive. People will need to eat and drink no matter what happens in the economy. So while purchase patterns may not be the same over time — for example, some shoppers will move to cut-price items in a recession — over decades demand for supermarkets is likely to be robust.

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Whereas some retailers have crumbled under the weight of digital competition, that seems unlikely to happen to supermarkets. Physical shopping is convenient for many customers, and the supermarkets have proven themselves agile competitors to take on the likes of Ocado when it comes to online selling. Indeed, last year Ocado had £2.9bn of retail revenues compared to £53.8bn at Tesco.

So I expect sales to continue to grow broadly in line with the economy over the long term. What concerns me more about Tesco’s growth prospects is not sales but profits. Retailing is brutally competitive, a recent reminder of which was the collapse of McColl’s. Discounters like Aldi and Lidl continue to grow aggressively. That could add to pressure on profit margins in future. That could be bad for Tesco share price growth. Indeed, Tesco shares have lost more than half their value over the past 15 years.

Income opportunities

A business like Tesco tends to be highly cash generative. The Tesco dividend grew 19% last year and currently the shares offer a yield of 3.9%. That is attractive to me, although there are other FTSE 100 blue chip shares that offer me the same or higher yield.

The dividend is not guaranteed. In 2014, Tesco cut its dividend following an accounting fraud. Other risks could hurt the dividend, for example if price competition leads to smaller profits. But, over time, I reckon Tesco’s strong market position and retailing expertise should help it keep paying an attractive dividend.

My next move on Tesco shares

I see Tesco as a company with a strong brand, high customer demand, and business expertise. I think it could be around for decades to come and could continue to perform well.

But the share price growth prospects excite me less than for companies in faster-growing industries. I do like the income potential of Tesco, but I could get a similar yield from quite a few other companies, some of which I think also offer me more growth potential.

Given the long time frame of a pension, I would prefer to own shares in my pension that I think have strong growth prospects. Although I would consider holding Tesco shares, notably for the dividend, at the moment I do not see a compelling reason for me to buy. That could change, if the share price becomes more attractive or the company continues to grow its dividend in the high teens as it did last year.

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Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Ocado Group and 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.

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