With an undemanding price-to-earnings ratio of 11, Tesco (LSE:TSCO) shares are nothing if not cheap.
Tesco is one of the best-known FTSE 100 shares in the UK. Just like most of the products on its shelves the supermarket costs very little, and produces a decent return. But are Tesco shares the best place to stash your cash right now?
I’ll tell you exactly what I think, and show my workings too!
Tesco is a popular place to shop, that’s certainly true. With all the market uncertainty from Covid-19 that would seem to make Britain’s largest retailer an attractive place to stash a large amount of cash. Add in a decent 4.1% annual dividend and Tesco shares start to look like a very healthy option.
Forget a Cash ISA
Taking dividends is objectively a better way to bring in steady cash over time than leaving your money rotting in a bank account. Try asking for more than a single percent interest on your cash balances. You’d be laughed out of the branch!
Even a top-of-the-line Cash ISA can’t compete with Tesco shares. The biggest, best, bells-and-whistles easy-access Cash ISA in 2020 offers a pathetic yearly interest of 1%.
£20k in a Cash ISA would make you just £200 richer at the end of the year!
That’s barely enough to cover inflation.
Tesco shares its fortunes
By contrast, investing the same £20k in Tesco shares? At today’s price of around 220p, that would give you around 9,100 Tesco shares.
We’ve just heard on 7 October that Tesco is raising its dividend payout for the first half of the year by 20.8%, to 3.2p per share.
So running the numbers, your 9,100 shares would give you a £291.20 dividend payment.
And that’s just for the first half of the year.
So what’s the outlook for the future?
Interim results released in October show that by far Tesco’s largest market, the UK and Ireland, saw an 8.6% uplift in sales compared to 2019. Pre-tax profits jumped from £428m last year to £551m this time around.
The addition of Imran Nawaz as Tesco’s new chief financial officer from FTSE 250 giant Tate & Lyle could help shore up profits too.
In the short term, Tesco has said it faces £725m in extra costs from Covid-19. There is also the ugly spectre of Brexit which has yet to rear its head. There are expected to be higher costs for the supermarket in relation to EU tariffs. And if Tesco decide not to pass on the costs through prices on the shelves, it’s inevitable its profit margins will be hit over time.
So what’s the conclusion? Do Tesco shares make for a strong long-term investment? Tesco controls by far the biggest UK market share of any supermarket, according to data analytics giant Kantar Worldpanel. It’s a staple of British life.
And like my colleague at The Motley Fool, Alan Oscroft, I agree that it pays good dividends and offers strong value from its cheap forward P/E multiples. However, the size of the company’s £21bn market cap means that growth is likely to be slow and steady over time, rather than rapid. Tesco shares likely won’t make you a fast million quid, but I think they could be a solid investment option.
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TomRodgers 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.