The supermarket chain Tesco (LSE: TSCO) has thousands of items in its stores designed to tempt shoppers. But should I consider adding Tesco shares to my basket? If I had spare cash right now, I would be happy to buy them for my portfolio. Here is a trio of reasons why.
1. Long-term business outlook
As a long-term investor, I am looking for businesses I think can do very well far into the future. That consists of a couple of considerations.
First, will there be strong demand in this particular market sector in the future? Secondly, does a given company have some sort of competitive edge that can help it capitalise on that demand, even in the face of heavy rivalry?
I think Tesco delivers against these criteria. People will always need to eat, so I expect the grocery market to stay resilient, even in a worsening economy. Tesco is the leading supermarket operator in the UK. I think its large customer base, store estate and trading expertise give it a competitive advantage.
One risk is the rise of discounters like B&M and Aldi. They could squeeze profit margins in the industry.
2. Attractive valuation
Another reason I would be happy to buy Tesco shares today is because they trade at what I see as an attractive valuation. Over the past year, the Tesco share price has fallen 20%.
It now trades on a price-to-earnings ratio of just 10. For a company with the attractions of Tesco, I see that as very attractive.
The share price fall points to the risk of falling earnings. As shoppers tighten their belts, they may buy less expensive groceries. That could hurt earnings at Tesco. But in the long term, I expect the business to stay profitable. I see the current share price as an attractive buying opportunity for my portfolio.
3. Tesco shares offer dividend growth opportunities
At the moment, the dividend yield on Tesco shares is 4.8%. I already find that attractive. But I also see the opportunity for strong dividend growth ahead.
Last year, the annual dividend grew by 19%. So far this year, the interim dividend has grown by 20%. Despite last year’s growth, the dividend was still covered by earnings twice over. That leaves room for further dividend growth in future.
That appeals to me, as the Tesco dividend could make a welcome addition to my passive income streams.
Buy now or wait?
After falling a fifth in 12 months, Tesco shares look like they are suffering from investor nervousness about the possible impact of the recession on profits. Even a large dividend boost has done little to stop the shares losing value.
So why would I buy today if I had spare cash rather than waiting in the hope pf the shares falling further?
I already think the Tesco share price is attractive for this quality of business. So I see no need to wait. If I wait to buy, I will miss out on dividends between now and then.
