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Tesco shares: should I buy for my 2021 portfolio?

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The year 2021 has been a good start for stock investors in the UK, with the FTSE 100 index rising 4.2% year-to-date at the time of writing. Tesco (LSE: TSCO) shares have not disappointed investors, as it rose 4.8% in the same period.

Tesco’s sales are encouraging

Tesco released its Q3 and Christmas trading statement today. Revenue grew by 7.0% year-on-year to £19.9bn. Comparable sales growth was 5.7% for the third quarter and 5.4% for the 19 weeks including the Christmas trading period.

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UK sales grew by 7.6% y-o-y to £14.7bn, primarily helped by the strong growth in all formats, channels, and categories. The lockdown also encouraged more customers to do online shopping, which equated to approximately £1bn in extra sales over the 19-week period. Large store sales were also strong as customers favoured less frequent shopping trips.

Tesco started the Aldi Price Match in March 2020 and has received a positive response from its customers. Another important initiative was the starting of Clubcard Prices in September. Its Clubcard app has over two million active users.

Tesco completed the £8.2bn sale of its Asian businesses in Thailand and Malaysia on 18 December 2020. It intends to pay out the proceeds through a special dividend and share consolidation of £5bn. It also made a one-off contribution of £2.5bn to the Tesco Pension Scheme.

The company is also confident that its good relationships with its suppliers will enable it to maintain strong levels of availability of supplies in the initial Brexit transition period.

Tesco maintained its guidance for 2020-21 financial year to be unchanged. Its retail operating profit is expected to be at the same level as in 2019-20. However, it excluded the impact from the repayment of £535m in business rates relief paid in December.

The Tesco Bank will be a drag to the company’s profits as it expects to report a loss between £175m to £200m for the financial year. It also increased its annual Covid-19 related costs to £810m, an increase of £85m from the previous estimate.

Macro environment

According to market research firm Kantar, British shoppers spent a whooping £11.7bn on groceries in the month of December 2020. This is a huge relief to the retail sector, overcoming the fears of lost sales due to the lockdown. Digital orders accounted for 12.6% of grocery spend during December when compared with 7.4% in December 2019. The closure of bars, restaurants, and cafés channelled the flow of money into retail grocery stores.

The company is facing competition from online retailers and also from big retail players like Lidl, Aldi, Asda, Sainsbury’s, and Morrisons. The lockdown might also have a negative impact on the economy in the medium term.

Final words

Tesco shares are currently trading at a forward P/E ratio of 13.30, which is not very cheap for me to consider them a value buy. However, I would like to include the company’s shares in my watch list as it has a stable balance sheet. The sale of businesses in Asia will further strengthen its balance sheet. Its large size will also help to withstand any downturns better than other smaller players, I believe, too.

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Royston Roche 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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