Brexit uncertainty is dominating the UK stock market today. In this environment, I think the only way for investors to protect their money is to buy into defensive assets with a constant demand, and there’s nothing more defensive than food and drink.
With this being the case, I think Tesco (LSE: TSCO) could be one of the best stocks to own to protect your portfolio against the fear and uncertainty of Brexit.
No matter what happens when the UK leaves the EU at the end of March next year, demand for food and drink is unlikely to change. So, Tesco’s cash registers should continue ringing throughout the divorce process. The most significant risk to the company’s operations, however, is the possibility of food shortages if the UK crashes out without a deal.
To try and reduce the risk of this happening, management says it is working with suppliers to put contingency plans in place and is considering stockpiling food in the worst-case scenario. I reckon contingency planning should help Tesco avoid the worse of any Brexit-related supply chain disruption.
Aside from Brexit planning, the rest of the Tesco empire seems to be in excellent shape. For the three months to the end of August, the supermarket giant’s established stores in the UK and Ireland increased sales by 4.2%, the fastest rate of growth in at least a decade. Most of this growth came from Booker, the wholesaler Tesco recently acquired and is still integrating.
Booker sales expanded 15% during the period, thanks to its access to Tesco’s distribution network, which has allowed the firm improve deliveries to independent clients.
Following this growth, City analysts are now forecasting a jump in earnings per share (EPS) of 28% for the company’s 2019 financial year. As the company reported EPS growth of 18.4% at the end of the fiscal first half, and with the all-important Christmas trading period completed, I reckon it’s highly likely the group will meet City growth expectations for the full year.
And if the company does manage to navigate its way through Brexit successfully, analysts are predicting further earnings growth of 20% for the 2020 financial year, which ends in the first half of that year. An EPS figure of 16.8p has been pencilled in, indicating that the stock is trading at a 2020 P/E of 11.65.
This is not a particularly cheap valuation, but considering the company’s dominance of the UK retail sector, and the fact that it’s unlikely to see any significant drop in sales due to Brexit, I think it’s a price worth paying.
Tesco is also working on improving its dividend credentials. After eliminating the dividend in 2015, management reintroduced a token one (3p per share) last year, and analysts believe the payout will grow to 7.6p per share by 2020. Based on these forecasts, shares in the retailer currently yield 2.7%, rising to 3.9% by 2020.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Tesco. 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.