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I think it’s time to double down on the Tesco share price

Rupert Hargreaves
·3-min read
Various denominations of notes in a pile
Various denominations of notes in a pile

The Tesco (LSE: TSCO) share price has been one of the best UK investments to own this year. Over the past 12 months, an investment in the retail giant has outperformed the wider FTSE 100 by around 14%, including dividends.

The company’s defensive nature and size have helped it outperform in the current economic environment. And, as the coronavirus crisis continues, I think these advantages will continue to work in the group’s favour.

Tesco share price advantages

According to its latest trading update, the group’s sales during the first half of its financial year increased by 6.6%. A jump in food sales helped offset a decline in other parts of the business.

Unfortunately, costs also lept. Tesco has incurred significant expenses relating to the coronavirus pandemic. These reached £530m in the first half of the year, and will total £725m for the full year. However, the government’s year-long business rates holiday will offset a good chunk of this.

As a result, group operating profit in the first half of Tesco’s financial year was £1.01bn, down 4.5% on last year.

I think these figures show the retailer’s resilience in uncertain times. Even though the group has had to grapple with higher costs, stockpiling by customers and a substantial drop in sales of some product lines, it has come out relatively unscathed.

This bodes well for the future. As the coronavirus crisis continues, I think investors would do best to stick with companies that have already shown they can weather the storm.

Tesco’s first-half results showed it falls into this bucket. Therefore, I think it’s highly likely the group will continue to produce attractive returns for investors, relative to the rest of the market, for the next six to 12 months.

Dividend champion

Unlike many other FTSE 100 companies, the group has also maintained its dividend to investors. The Tesco share price is on track to offer investors a dividend yield of 3.7% this year. That looks incredibly attractive in the current interest rate environment.

The group is also in the process of divesting its international operations. Sales of its businesses in Thailand, Malaysia and Poland are “progressing well,” according to the latest update. The £8.2bn sale of the operations is expected to complete during the next few months.

Management is planning to use some of the cash to reduce group debt. Meanwhile, £5bn is earmarked for a special dividend. Therefore, the total cash payout to investors this year could be significantly higher than the 3.7% projected above when this special distribution is taken into account.

That’s why I think it could be time to double down on the Tesco share price. Over the past six months, the company has shown it can prosper in the current economic and pandemic climate.

This bodes well for the retailer’s future, and there’s also the potential for large cash returns when the business sells its international operations.

The post I think it’s time to double down on the Tesco share price appeared first on The Motley Fool UK.

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Rupert Hargreaves owns no share 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