Tesco (LSE: TSCO) shares have had a bit of an erratic 12 months.
Is Tesco an easy buy for 2023? I take a look at a few things that might suggest it is, and a few that could indicate the opposite.
Firstly, on the downside, the Covid boost is gone. In the days of social restrictions, Tesco’s online shopping and home deliveries shone. Those upstart rivals Lidl and Aldi just couldn’t compete. They might have been making inroads into the UK groceries market, but there were no home deliveries.
But now, the playing field is back level again, and Tesco’s rivals are once more free to compete through cost cutting.
Market share
Still, though the competition has been back to full heat for a while now, Tesco is maintaining its market lead. Kantar still puts Tesco’s share of the UK groceries market at a little over 27%.
That seems quite remarkable really, especially when we consider second-placed Sainsbury has just 15%. And those two recent interlopers aren’t close, with Aldi on 9% and Lidl at 7.5%.
But even with its commanding market lead, Tesco is suffering from today’s intense price wars. Recession doesn’t help either, raising supply costs at a time when shoppers’ spending money is being squeezed.
Margins
At the interim stage, Tesco’s operating margin had declined by 74 basis points. And I don’t expect things to get any better in the second half.
Then again, even if a company’s margins are being squeezed, its stock can still be a buy if the price is right. Looking at fundamental valuation measures, I think it might be.
Analysts have Tesco on a forward price-to-earnings (P/E) multiple of under 12 now, and dropping over the next couple of years. We should treat forecasts with caution. But if that’s as high as the P/E might get during a recession when earnings are lower, it could make Tesco shares an attractive long-term buy for when the economy improves.
Dividends
Tesco’s dividend yield looks like it should be around 4.5% this year, or maybe even a bit higher. I think that’s good for a relatively defensive stock. But cover by earnings could well be squeezed a little this year. I suspect it will still be adequate, but I can’t rule out a dividend cut during the recession.
Investors who think Tesco shares are worth buying now are in good company. The company itself does too, and is currently engaged in a share buyback. It recently commenced the next phase of its £750m programme, this tranche worth up to £203m.
Verdict
There is no stock that I’d describe as truly a no-brainer, as every investing decision needs some thought.
Tesco’s business is pretty easy to understand, though. And as the biggest in the sector, I think it has defensive barriers. Couple that with a track record of healthy cash generation and shareholder returns, and I rate Tesco as one stock that needs less brainwork than most. It’s on my list of 2023 buy candidates.
