Planning your investments for retirement can be tricky. Not all companies are suitable for a retirement portfolio. Indeed, when you’re planning for 20, 30, or 40 years in the future, you need to be sure the stocks you buy will still be around when you decided to quit the rate race.
A long-term business
When it comes to picking long-term businesses, Tesco (LSE: TSCO) stands out. The largest retailer in the UK provides an essential service to customers. Our need for food and drink will never disappear, and there’s always a Tesco nearby that can help meet this need.
Even in recent years as the German discounters have grabbed market share from the retail giant and its peers, Tesco has managed to keep its head above water.
What the firm benefits from more than anything else are its economies of scale. Tesco is so big it can transport goods at a lower cost than anyone, and suppliers are willing to give the group sizable discounts to keep its account.
Tesco’s decision to acquire wholesaler Booker several years ago was a masterstroke by management. This deal increased the group’s economies of scale even further and took the business into the key wholesale market.
Customers in this market tend to be more sticky than regular consumers. If you run a business, you need to know that what you order from the wholesaler will be there on time, fresh, and at an attractive cost.
Business owners are not going to risk lousy service from another provider just because they can save a few pounds on each order. A delay or bad quality food could mean lost revenues. Tesco can also make the most of Booker’s distribution network when it would usually be sitting idle.
At the time of the deal, management claimed that many of Booker’s lorries and vans were underutilised. As deliveries took place in the early hours, for the rest of the day they were underused. By integrating these vehicles into the Tesco group it could reduce idle time and improve efficiency, management claimed.
Cost savings like these have helped Tesco claw its way back to health after stumbling in 2014. It’s now well-placed to continue to grow over the long term. Population growth, as well as inflation, should allow the company to sell more at higher prices over the long term. This should propel earnings growth.
On top of this, the stock offers a dividend yield of 3.4% at the time of writing. The combination of this dividend and earnings growth could yield a 6%+ per annum return over the next few decades. That would be enough to grow modest monthly contributions into a sizeable nest egg to retire on and beat the State Pension.
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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.