Back in 2006, billionaire investor Warren Buffett decided Tesco (LSE: TSCO) looked tasty. He started buying Tesco shares and ended up as one of the supermarket’s largest shareholders by 2014, with a stake of over 4%.
He started selling that year, as Tesco admitted its accounts had been misleading and profits had been overstated.
A decade on, would I have profited from buying shares as the Sage of Omaha unloaded them?
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Buffett missed out on a solid return
In a word: yes!
Since their December 2014 low, Tesco shares have rebounded by 73%.
On top of that, although the dividend was suspended for a number of years following the accounting scandal, it has since been restored.
The current dividend yield is 3.3%, meaning that if I had bought at that low 2020 price, I would now be earning an annual yield of around 5.7%.
Was Buffett still right to sell?
Still, although Tesco shares have bounced back and the dividend yield is reasonable, that does not necessarily mean Buffett made a mistake to sell his stake when he did, even at a big loss.
After all, tying up money for a decade carries a big opportunity cost. Although Tesco has done fairly well in the past decade, other shares have done better.
Take Apple as an example. It is up over 700% since December 2014. Buffett did not own a single Apple share then and it later became his biggest holding. Putting money into Apple turned out to be far more lucrative than if he had left it in Tesco.
On top of that, we now know that Tesco recovered from its accounting scandal. But that was not yet clear in 2014, without the benefit of a decade’s hindsight. In his 2014 shareholders’ letter, Buffett even wrote, “An attentive investor, I’m embarrassed to report, would have sold Tesco shares earlier. I made a big mistake with this investment by dawdling”.
He is an experienced enough investor to know that, when a company reveals an accounting problem, that can often be just the start not the end of the story. Tesco bounced back, but not all companies in such situations do. Buffett’s sale even at a large loss makes sense to me from a risk management perspective because, as he says, there is rarely only one cockroach in a kitchen.
Lots to like again
What presumably attracted Buffett to Tesco is still apparent in today’s business, I reckon.
The grocery market is huge and enduring. Tesco is the market leader by far in the UK, although over the past decade, rivals like Aldi and Lidl have increased the pressure.
That has weighed on profit margins and I see a risk that will continue. Tesco’s large store estate, strong brand, sophisticated loyalty programme, and economies of scale all work in its favour.
But, for now at least, the business and its valuation are not sufficiently exciting for me to add it to my portfolio.
