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Why I’d buy the Tesco share now

Image: Tesco

When I wrote about supermarket stock Tesco (LSE: TSCO) last month, I was hesitant to buy the share just yet. My conclusion was that even though its share price could rise, it would be a good idea to wait for another update before deciding. Today Tesco released that update. 

Sales growth slows down

The FTSE 100 company reported a 1% increase in like-for-like (LFL) sales for the 13 weeks ending 29 May. LFL sales measure the change in sales across the same stores over time. The advantage of this measure is that it removes any bump up in sales if a new store is opened or a decline in sales if one is closed. 

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This measure showed a sharp decline from the 7.9% increase seen for the full-year 2020-21. To be fair, some of the decline was to be expected. In its outlook at the time of its full-year results, Tesco had expected additional gains in UK sales to fall as restrictions eased. The UK market accounts for the bulk of the supermarket’s retail revenues. 

Still, the extent of the decline is glaring according to me. This probably explains why the Tesco share price is down by 3% as I write. 

Positives in the update

I do think, however, that there are some positives in Tesco’s latest trading update as well. It also gives us a comparison against LFL sales two years ago, which is helpful because it was a more typical year than 2020. This shows a more encouraging growth of 8.1%, with the UK’s growth at 9.3%.

I also like its strong online sales growth for the UK. Compared to 2020, online sales grew 22.2%, and a huge 81.6% compared to 2019. Online orders surged across grocery retailers last year. While it was clearly pandemic-driven, it is also believed that some of the shift to online sales is permanent. How much of it will continue post-lockdowns was a wait and watch. Now we have some proof that this is actually the case. I see this in my own choices as a consumer. It is far easier, quicker, and even more cost effective to order groceries online now and I have no desire to change that.

I reckon that in-store sales can also pick up greater pace over the rest of the year. A healthier economy over the rest of 2021 can result in increased consumer demand across products and services. 

Decent dividend yield

The Tesco share is also somewhat attractive from a dividend standpoint. It has a yield of 4.3%, which is not the highest, but it is still decent in my view. 

My takeaway for the Tesco share price

The big challenge with the share is that its price has gone nowhere in years. I see the value of the stock, but also that it is neither the best growth stock nor the best income stock around. On balance, though, I think if it sustains its performance it could reap rewards for investors over time. I would buy the Tesco share now, but with awareness that it might not pay off.

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Manika Premsingh has no position in 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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