Why Tesco PLC Is A Top ISA Buy

tescoIt’s that time of year again when investors are in search of the best way to make the most of their tax allowance. Over the short term, holding stocks and shares in your ISA is riskier than cash, but if you go about it the right way — investing in solid companies that pay solid dividends — then you can seriously improve your wealth.

I believe Tesco  (LSE: TSCO) (NASDAQOTH: TSCDY.US) is one such company worth looking at. It is the UK’s biggest supermarket with annual sales of £78bn and has a history of increasing dividends over the last 28 years.

Here are the reasons why Tesco is a top ISA buy:


If you’ve been keeping up with the business news lately, you might think it’s 1999 all over again. If you can explain to me why white-goods company AO, formerly known as Appliances Online, is worth £1.2bn on profits of £6.8m, then you can be my guest. I’ll just go and boil the kettle first.

That said, there’s no doubt that online shopping offers promise for canny investors. The financial crisis hit the high street hard, and the internet has revolutionised how we shop. It’s cheap, convenient and, what’s more, it’s permanent.

Something you might not know about Tesco is that it is the largest online grocer in the world. According to figures from Kantar, for every £1 UK shoppers spend on internet food shopping, almost 50p ends up in Tesco’s coffers.

During the Christmas period Tesco’s online grocery sales rose 10%, general merchandise improved 25% and clothing surged 70%. In total, the online business generated £2.7bn in sales and £127m in profit.

It’s cheap now

You can get in on this for cheap, too. While shares in the online grocer Ocado, which has never made a profit, have surged 400% in the last two years, Tesco is currently trading at a discount. Tesco shares are down almost 20% over the same period.

Obviously, I have certain reservations about some online businesses. But Tesco is a company with a steadily rising dividend in concert with steadily rising profits:

  2007-08 2008-09 2009-10 2010-11 20011-12
Dividend 10.9p 11.96p 13.05p 14.06p 14.76p
Profit £2.8bn £3.1bn £3.9bn £3.5bn £4.0bn

This is the kind of investment you should be looking at for your ISA.

Now, it’s no secret that the grocery sector is out of favour right now, but I believe that Tesco is not only an attractive business, but a it’s a market leader with potential to grow. Unlike a blue-sky gamble that might put your money at risk, Tesco has a market share of 29.6% and isn’t going anywhere, making it a solid bet for your ISA.

When selecting shares for your ISA, you ought to think long term -- the real money isn't made by selling every time there's an incremental rise, not with those pesky trading fees. Instead, you should consider shares that you're happy to 'buy and forget'.

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> Mark does not own shares in Tesco. The Motley Fool owns shares in Tesco.