We are now in a recession. That could be bad news for sales and profits at many businesses. But some firms are seen as defensive, because customer demand might hold up even in economically tough times.
Supermarkets are an example. People still need to eat, drink and wash in a recession. So could the Tesco share price hold firm, or even increase, while the wider economy struggles?
Tesco in a recession
I think Tesco does have some defensive qualities. Its core business is selling the sorts of items millions of customers will need whether or not there is a recession. The supermarket’s range of prices means that even if shoppers have less money to spend, they may still keep visiting the chain’s stores.
But in other ways, I see risks for Tesco in a recession. I see some of what it sells as discretionary, meaning shoppers may cut back when money is tight. That could lead to smaller basket sizes and sales revenue.
Even if the demand side of Tesco’s business holds up quite well, what about the supply side? If inflation pushes up the price of sourcing products, as we have seen recently, that could be bad for the retailer’s profitability.
So, overall, although I think Tesco might hold up quite well in a recession, I do think it could face pressures as a result of economic weakness. Supermarket retailing is highly competitive and an economic downturn might lead to a price war, with some rivals trying to attract customers by cutting prices. If that happens it could hurt profit margins across the sector, including for Tesco.
The Tesco share price has fallen
Concerns like those may explain why the Tesco share price has fallen 21% over the past year.
However, it has not all been bad news for its shareholders during that period. In April, the company announced that the annual dividend would be 19% bigger than the year before. That is a hefty increase I take as a sign of management confidence. Pre-tax profits were more than triple what they had been in the prior year, although that baseline included significant impact from the pandemic era.
So the Tesco business has been performing well. Sales in the company’s most recently quarter showed 2% like for like growth compared to the same period last year. I continue to see more growth opportunities for the retail giant.
Why I’d buy
As the fall in the Tesco share price suggests, it is not immune to the wider economic picture. So although the shares might defy a recession, I would not rely on that happening.
However, I continue to like Tesco as a business. It has a large existing customer base, strong brand and a well-established position in the market. It can benefit from economies of scale. The share price fall means Tesco now yields 5.4%, which I find attractive for such a blue-chip FTSE 100 company.
If I had spare money to invest right now, I would be happy to spend some of it on Tesco shares to hold for the long term.
