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The Tesco share price is going nowhere fast, so why I would still buy this FTSE 100 stock?

Harvey Jones
·3-min read
British pound coins in birds' nest
British pound coins in birds' nest

Dave Lewis did a tremendous job of reversing the falling Tesco share price during his six-year spell at the company. He joined as CEO after Philip Clarke’s unhappy reign left the supermarket giant facing a host of problems, with sales down, customers disillusioned, overseas ventures canned and an accounting scandal lying in wait.

Despite the Lewis transformation, the Tesco share price went nowhere fast under his tenure, trading just 8% higher than five years ago. I still think that’s some achievement, because the grocery sector is a tough place to do business. New boss Ken Murphy will find out soon enough.

The supermarkets have had a good pandemic. They established themselves as a key service as they kept the country in food and toilet rolls, an underrated achievement. The Tesco share price was spared the worst of the stock market crash in March as a result, but is now declining again.

This FTSE 100 sector is tough

On Wednesday, Tesco revealed a 15.6% drop in group operating profit to £1.04bn in the six months to 31 August. Revenue grew 0.7% to £28.7bn but it spent £533m adapting to pandemic challenges, hiring extra staff, and dealing with social distancing rules and panic buying. Unsurprisingly, online sales grew fastest, up 69%.

While “significant uncertainties remain”, Murphy expects retail operating profit to be at least the same as last year’s, on a continuing operations basis. There are an awful lot of FTSE 100 chief executives who wish they could say the same right now.

As I said, the grocery sector is tough. Tesco has stolen back customers from Aldi, but the German discounters are here to stay and will be a constant thorn in the flesh. Aldi is now moving online as well.

The Tesco share price is unlikely to soar

As well as being the UK’s largest grocery firm, Tesco also has a financial services operation. Tesco Bank, and that has just posted a £155m operating loss before exceptional items. This reflects an increase in the provision for potential bad debts and reduced income. The pandemic is going to pose further challenges, making it hard for the Tesco share price to push on.

Tesco’s valuation looks relative attractive at 11.6 times earnings, but I think share price growth will be hard to come by. Its operating margins remain thin at just 3.9%, and are predicted to shrink to a wafer thin 2.6%.

The reason why I would still buy Tesco is the yield. Currently you get 4.3% a year, covered twice by earnings. That looks safer than many on the FTSE 100 and marks Tesco out as an income hero, in these difficult times. Better still, rather than scrapping that shareholder payout, Tesco just hiked it by an impressive 20.8%, to 3.2p a share.

I wouldn’t buy into the Tesco share price if I was after growth. But if you are looking for income, it does look a top FTSE 100 dividend stock.

The post The Tesco share price is going nowhere fast, so why I would still buy this FTSE 100 stock? appeared first on The Motley Fool UK.

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Harvey Jones 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.

Motley Fool UK 2020