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Is the falling Tesco share price a buying opportunity?

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I wrote about the Big Four supermarkets when the market crashed last year. Tesco (LSE:TSCO) was my number one pick of the three supermarkets listed on the FTSE. Recently, the Tesco share price has fallen. Is this a good opportunity to buy even cheaper?

Tesco share price decline

TSCO completed the $10.6bn sale of its businesses in Thailand and Malaysia to CP Group in December. When the deal was first announced last year, the company promised to return approximately £5bn to investors. An additional £2.5bn was to be used to bolster its pension fund.

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I believe two events linked to this deal have affected the Tesco share price. First, a special dividend was approved at general meeting of investors. This only had a minor effect on its share price. Then, the company consolidated its shares. If it hadn’t consolidated, the stock would have dropped massively following the dividend payout. The payout equated to 50.93p per share, which is approximately 20% of Tesco’s market cap. Without the consolidation, the Tesco share price might have fallen by a similar amount. Essentially, I believe the consolidation was designed to maintain Tesco’s share price.

Since late January, the TSCO share price has fallen close to 10%. This is also the same margin by which it is down over the last 12 months.

Investment case

When building an investment case for any stock, one of the key indicators I look at is growth potential. So does the current Tesco share price entice me when looking at its long-term growth potential?

Tesco at one point had a 30% market share of the UK supermarket industry. It is reported that the industry will grow a modest 15% between 2019 and 2024, which is less than 3% annually. Tesco and its share price has come under pressure from Aldi, Lidl, and Ocado. The Covid-19 pandemic has affected consumer spending habits. Consumers are looking to make their money go further, which is where Aldi and Lidl are better positioned than Tesco. Ocado has excelled due to its online only platform and delivery service. I am not convinced Tesco has enough edge over competition to maintain and build on market share against these other players. 

From a financial perspective, the Tesco share price could be buoyed by some positives. Analysts expect Tesco to generate revenue growth, although only just over 1%. Profits are anticipated to rise and earnings per share (EPS) are predicted to rise over 50%. A prospective dividend yield close to 4% is an attractive proposition too.

There are a few negatives to the financials. Going back to the dividend, Tesco doesn’t possess a great dividend growth track record. It cancelled its dividend a few years ago. As a savvy investor, I like to invest in firms that consistently increase their dividends.

My verdict

There is a lot to like about TSCO. The current Tesco share price is attractive. When I drill down into the finer detail, however, there are too many issues and negatives which are putting me off. I do not think TSCO has enough long-term growth potential for my liking.

I would rather invest my money elsewhere. With that in mind, here are some of picks from my best stocks to buy now list.

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Jabran Khan has no position in any 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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