Tesco (LSE: TSCO) shares have experienced a big pullback recently. Back in January, they were trading above 300p. Today however, they can be snapped up for a little over 200p.
When I last covered Tesco in April, I said that there were things I liked about the company but that I didn’t see the stock as a ‘strong buy’ for my portfolio. Has the recent share price fall changed my view? Let’s discuss.
Three reasons to buy Tesco shares today
I’ll start by looking at what I like about Tesco from an investment perspective. The main appeal, to my mind, is the ‘defensive’ nature of the company.
Right now, the UK economy is going downhill fast. And, realistically, things are likely to get worse before they get better. However, no matter what happens, people are still going to need to eat. So Tesco’s revenues are unlikely to fall off a cliff.
I also like Tesco’s loyalty scheme. The supermarket giant gives great deals to its Clubcard members. So there’s a real incentive to join up. This means Tesco can collect data on its customers. The more data it can amass, the better positioned it will be to generate growth going forward.
Finally, there’s the dividend. At present, analysts expect Tesco to pay out 10.6p per share in dividends this year. At the current share price, that equates to a yield of over 5%. I see that high yield as a real attraction in today’s choppy market.
Putting this all together, there’s plenty to like about Tesco shares right now.
As for the valuation, Tesco currently trades at around 10 times this year’s projected earnings per share (versus 12 when I last covered the stock). At that multiple, I think there’s some value on offer.
Risk vs reward
Having said that, there are quite a few risks to consider here. The biggest, to my mind, is shoppers gravitating towards low cost supermarkets such as Aldi and Lidl.
Recently, Aldi said trading had accelerated over the last six months as shoppers had moved to save money amid the cost-of-living crisis. So Tesco is going to have its work cut out to retain customers. It will have to discount aggressively, and this could hit profits.
Inflation is another big risk to think about. Right now, Tesco is facing union calls to increase workers’ pay after a number of rivals raised hourly rates for a second time this year. This is another threat to profitability.
Debt is also a risk. At the end of February, Tesco had net debt of £10.5bn on its books. With interest rates rising, this is going to become more expensive to pay off. Higher interest payments could mean lower profits.
My view now
Weighing up the risk versus the potential rewards, I would be willing to buy a few Tesco shares for my portfolio as a defensive position if I had some spare cash to deploy. Near 200p, I see some value on offer.
However, I wouldn’t make Tesco a large position in my portfolio. That’s because I think there are plenty of other stocks that are likely to outperform the supermarket giant in the years ahead.
