With talk of interest rates heading to 6%, I’m looking at UK stocks to get me through the crisis. FTSE 100 stock Tesco (LSE: TSCO) is one that’s caught my eye. Here are two reasons it could be the best inflation-resistant buy right now.
The ‘greedflation’ argument
Defensive stocks have stable incomes even in economic tough times, and Tesco is about as defensive as it gets. Food and household essentials will bring in revenues, inflation or no inflation.
On top of this, there is a line of thinking that supermarkets benefit from ‘greedflation’. This is where firms push their prices higher than inflation demands because there is something in the news to blame it on. The result? Bumper profits and happy shareholders.
The argument doesn’t stand up to scrutiny though. Operating income dropped from £2.6bn to £1.5bn last year. Margins went from 4.2% to 2.3%. Tesco is actually taking a big hit in profits to keep prices down.
Other supermarkets are doing the same thing – Sainsbury’s for example. The idea is to keep market share until the cost-of-living crisis eases. But lower earnings do make Tesco seem like a less attractive inflation-resistant stock right now.
£2.50 a share?
The dividend return could help with inflation though – Tesco pays a good amount to shareholders. The percentage yield over the next year is expected to be around 4.4%.
That’s a tidy return, slightly higher than the FTSE 100 average of 3.7%. And you know, every little helps. But it’s lower than many individual Footsie stocks where a 5%-8% is commonplace. All told, it’s not nearly enough to make a case for being the best stock going here.
And with inflation above 8%, I don’t think I’d call a 4.4% return inflation-resistant. If I bought in, I’d need substantial share price gains just to have the same amount of money in relative terms.
Is a share price move likely? Well, Tesco is not exactly primed for growth. It sold its operations in Asia recently and most of the ‘big four’ supermarkets are actually losing ground here in the UK due to budget operators like Lidl and Aldi. I don’t see huge gains in the near future.
And really, that’s where Tesco has been in recent years. The shares cost £2.43 in 1998. Today, they cost £2.55. There’s been plenty of volatility in between, but shareholders haven’t seen much increase in the value of their shares.
Am I buying?
I would still say that Tesco is a solid firm that I may buy into at some point. Sooner or later, inflation will come down. And when it does, I expect I’d enjoy good returns from a well-run supermarket chain.
But if I’m looking for the best inflation-resistant investments, I think there are much better FTSE 100 stocks around at the moment.
