Right now, British consumers are getting hammered. Household budgets are under huge strain, thanks to a toxic combination of soaring inflation, skyrocketing energy and fuel bills, and rising mortgage rates. So why am I considering buying Tesco (LSE: TSCO) shares very soon?
Tesco is the Goliath of grocery
In the past, I owned Tesco shares for many years. But it’s been perhaps a decade since I was an investor in the UK’s biggest supermarket chain. When I sold my stock, the shares were trading around 470p, versus Friday’s closing price 209.2p. Hence, it looks like I dodged a bullet by selling out many years ago. Now I’m thinking about buying back in. Why?
The first thing I like about Tesco is its market leadership and dominance of the UK grocery sector. In the 12 weeks ending 2 October, Tesco had a market share of 27% of the British grocery market. This makes the group the Goliath of UK grocers, even though its market dominance has declined over the past decade.
Of course, being #1 in a market delivers various economies of scale to the business. Tesco’s leadership means that it negotiates with suppliers from a position of strength. This helps the chain to maximise its margins, as well as minimising prices rises for customers. This long-standing resilience is attractive to me as a potential investor.
Tesco shares look underpriced to me
Despite Tesco’s role as the behemoth of British shopping baskets, its shares have had a tough 2022. Here’s how they’ve performed over six timescales:
| Five days | 3.2% |
| One month | -5.0% |
| Six months | -22.1% |
| 2022 YTD | -27.8% |
| One year | -23.6% |
| Five years | -11.0% |
Over the past 12 months, the Tesco share priced has dived by almost a quarter. Also, it’s lost more than a tenth of its value over the past half-decade. But these returns exclude dividends, which are a powerful part of this stock’s long-term appeal to me.
However, even Tesco has been hurt by the ongoing cost-of-living crisis. Hence, its shares are well below the 52-week high of 304.1p they hit on 28 January — four weeks before Russia invaded Ukraine. At the current share price of 209.2p, this FTSE 100 stock trades on around 10 times forward earnings and offers an earnings yield of 10%.
However, as an income/value investor, what draws me to this stock is its market-beating dividend yield of 5.5% a year (versus 4.2% for the wider FTSE 100). It’s worth noting that Tesco recently raised its half-year dividend from 3.2p to 3.85p a share, a juicy increase of 20.3%. Also, the ongoing £750m share-buyback programme will lift future earnings per share by shrinking the shareholder base.
I’ll buy Tesco soon
While I’ve no doubt that 2023 will be a really rotten year for UK consumers, my aim is to buy shares in Tesco to hold for, say, the next decade. Hence, if the price weakens again, then I’ll probably jump aboard. Also, I expect Tesco’s retail sales (and projected yearly free cash flow of £1.8bn) to rise over time. And I’m hoping that this will translate into higher returns for patient shareholders, including me!
