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Why I’d buy Tesco shares in a market crash

Roland Head
Supermarket aisle with empty green trolley

There seems to be a growing risk that we might see a market crash this year. Although there’s no way to be sure, I think it’s worth being prepared. One thing I like to do is to have a shortlist of stocks I’d want to buy during a sell-off.

Today I’ll explain why Tesco (LSE: TSCO) would be on my list. I’ll also highlight a FTSE 250 firm that’s a defensive choice, but has stronger growth potential than the UK’s largest supermarket.

Play safe, shop defensive

The growth of discount supermarkets Lidl and Aldi has forced the UK’s big supermarkets to up their game. Some have performed better than others in this tough environment. In my view, the big winner has been Tesco.

Under turnaround boss Dave Lewis, Tesco has maintained its market share, repaired its profit margins and returned to growth. Debt levels are down and the whole business appears to be much healthier than it was five years ago.

To some extent, Tesco’s share price reflects this strong performance. From a low of 150p in 2015, the stock has risen by nearly 70% to trade at around 255p.

At this level, the shares trade on 15 times 2020 forecast earnings, with a dividend yield of 3.2%. With earnings per share expected to rise by 10% this year, I’d say this was a fair price, but not cheap.

What I’d pay for TSCO shares

I wouldn’t mind buying Tesco shares at their current price. I think they should be reliable performers, even during a recession. But to be honest, I’d rather pay less.

For a mature business where growth is unlikely to be spectacular, I’d like a dividend yield that matches the yield on the FTSE 100. That’s currently about 4.3%.

For Tesco shares to offer a forecast dividend yield of 4.3%, the share price would have to fall to 195p. That’s about 20% below today’s level. The last time the shares dropped below 200p was December 2018. I’d see a similar fall this year as a buying opportunity.

A faster-growing alternative?

My next pick is FTSE 250 soft drinks firm Britvic (LSE: BVIC). The company’s UK brands include Robinsons, J2O and Tango. It also produces drinks for Pepsi in the UK under licence and operates in Ireland, France and Brazil.

Britvic’s history can be traced back to 1938. In its current form, the firm has traded on the London stock market since 2005. Over this period, the Britvic share price has risen by 276% to around 920p. The company has also paid a dividend that’s risen from 10p to 30p per share and has never been cut.

For me, the big attraction is that Britvic owns a number of distinctive brands. These give the business stronger pricing power and higher profit margins than a supermarket. For example, last year Britvic generated an operating margin of 8.4% last year. For Tesco, the figure was 3.4%.

Despite this, Britvic shares currently trade on the same valuation as Tesco stock. That’s right — BVIC stock is priced at 15 times 2020 forecast earnings, with a dividend yield of 3.3%.

What’s the catch? I’d guess that a drinks firm faces more risk than a supermarket of disruption from changing tastes and government interference.

But at current levels, I’d rather buy Britvic. And if the Britvic share price was to fall in a market sell-off, I’d definitely be interested.

The post Why I’d buy Tesco shares in a market crash appeared first on The Motley Fool UK.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Britvic. 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