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Why I’d invest £2k in the rising Tesco share price today

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The Tesco share price has been a rare climber in the stock market crash. As the UK’s biggest grocer, Tesco (LSE: TSCO) has benefited from the fact people still need to buy food (and toilet rolls), and couldn’t resist the urge to stockpile.

It’s only taken a slight hit since Covid-19 struck down so many on the FTSE 100, with the Tesco share price falling just 8.5% since peaking at 257p on 17 February. If I had £2k, or any other sum, I’d buy it today.

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Stockpiling sent Tesco’s sales jumping by more than a third. But this may be a one-off. Don’t expect the early buying frenzy to continue, unless we get a second wave of coronavirus.

Tesco share price holds firm

Tesco also benefited from the surge in demand for home deliveries, increasing its slots by 20%. But it still struggled to meet demand. The group, nonetheless, rose to the challenge and is a reminder of just how essential the supermarket giants are to us all.

By contrast to many CEOs, Tesco boss David Lewis pressed ahead with the company’s £900m dividend payout for the year to 29 February. That caused more than a little controversy because it has benefited from a business rates holiday. The Tesco share price was the beneficiary.

Tesco will face extra costs of between £650m and £925m as it hired extra staff to meet demand. However, as Lewis made clear, the group has a strong balance sheet and is in no danger of running out of cash.

I’ve been impressed by the way Lewis has turned around the Tesco share price since moving from Unilever in September 2014. The group posted an incredible five profit warnings in a year before he shook it up.

FTSE 100 dividend hero

At the time, I’d given up on the supermarkets. Discounting and endless price wars destroyed the investment case, while Tesco abandoned its dividend for five years after its accounting scandal.

I’m now sad to see Lewis go. I was also surprised to see the group appoint another outsider, Ken Murphy from Walgreens Boots Alliance. Let’s hope he can drive the Tesco share price to new highs.

Tesco now yields by around 3.8%, well covered by earnings, and looks like one of the most reliable dividend stocks on the FTSE 100. The supermarket business is tough and Tesco’s profit margins remain thin at 3.3%. However, it’s worth remembering Tesco still boasts a 26.8% share of the grocery market, despite the rise of Aldi and Lidl.

Tesco may also benefit when the lockdown eases, and people go out and start spending again. However, sales of liquid soap, tinned tomatoes, baked beans, frozen food and loo rolls may inititally flounder, as people may have enough of those items for now. 

The Tesco share price looks a good long-term buy-and-hold for me.

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Harvey Jones has no position in any of the shares 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.

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