Are Tesco shares too cheap to ignore?

Supermarket giant Tesco has posted a strong performance in the last year. Are its shares now too cheap for me to pass up?

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Image source: Tesco plc

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Shares in supermarket giant Tesco (LSE: TSCO) have been steadily trending in the right direction. So far in 2024, they’ve climbed 6.8%. In the last 12 months, they’re up an impressive 18.9%.

Zooming out, investors who snapped up the UK’s largest supermarket retailer five years ago would have seen their investment grow 7.7%, excluding dividends. But even with that rise, at £3.13, I reckon the stock looks good value. Is it too cheap to ignore?

Valuation

Of course, the best way to answer this is by looking at the stock’s valuation. Its shares trade on a price-to-earnings ratio of 12.7. While that doesn’t scream bargain, I’d say that’s an attractive valuation for a business of Tesco’s prowess.

More to it

Other factors need to be considered too. For example, Tesco’s a defensive stock, which I think gives it a further edge.

This means that regardless of factors such as the strength of the economy, demand for its products will remain. After all, people always need to eat and drink.

This means that in periods of economic downturn, like the one we’re in now, Tesco will provide stability to my portfolio. Last year, despite tough trading conditions, group sales, excluding VAT and fuel, rose 7.2%.

Alongside that, Tesco has a 27.2% market share, making it the largest player in the field by some distance. The closest competitor is Sainsbury’s, with 15.3%.

With two other large names, Asda and Morrisons, both now owned by private equity firms and plagued with debt, this has further given Tesco an opportunity to pull away from the competition.

In recent times, it’s taken advantage of this by agreeing longer contracts with suppliers as well as investing more heavily in technology.

The risks

Even so, there’s the argument to be made that Asda and Morrisons aren’t the competition that Tesco should be concerned about. In recent years its budget supermarkets Aldi and Lidl that have posed the biggest threat.

The cost-of-living crisis has seen consumers continue to shop around for the cheapest deals, meaning Tesco has had to price-match the fast-growing German competitors on many of its goods. This could squeeze its margins, which are already wafer thin.

Extra cash

But Tesco’s found ways to overcome this, such as its Clubcard scheme, which now has over 20m loyal users. What’s more, with its 3.9% yield, covered two times by earnings, there’s the opportunity to make some passive income. Last year, management hiked the dividend by 11%. Its forecast yield is predicted to rise to nearly 5% by 2026.

Time to buy?

So at their current price, are Tesco shares worth investing in? I reckon so. If I had the cash, it’s a stock I’d pick up today. While there may be other stocks on the Footsie that look better value, I think Tesco’s still a shrewd buy.

By buying it, I’d be adding a top-quality company to my portfolio. I’d also be going one step further in continuing to build a second income.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has recommended J Sainsbury Plc and Tesco Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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