In times of conflict, many investors turn their attention to shares perceived to have defensive qualities. FTSE 100 member Tesco (LSE: TSCO) is a good example. People always need to eat — and Tesco is the nation’s leading grocer by some distance.
No wonder Tesco shares can be a popular option when people are considering not just what groceries to pick, but also what shares might make it into their ISA.
How lucrative (or otherwise) has such an approach been lately?
Up by close to a quarter in just 12 months
Let’s take the past year as an example. During that period, the Tesco share price has increased by 23%.
Now, I think diversification is always important for an investor. It is never a good idea to put all your eggs in one basket. But thanks to having a new ISA contribution allowance open up each April, an investor may be able to put one year’s whole allowance (£20k) into Tesco shares while keeping their ISA healthily diversified, thanks to having invested some or all of their allowance in previous years.
That 23% increase in the Tesco share price over the past year means £20,000 invested in the supermarket back then should now be worth around £24,600.
As Tesco is fond of saying, every little helps – and for most of us, a near-25% gain within a year on one year’s ISA allowance is not just a little!
On top of that capital gain, there are also dividends to consider. At 3.1%, the current Tesco yield is a little above average for the FTSE 100 index. Someone buying at the lower price a year ago would be earning a higher yield though.
That is because dividend yield is a function of the dividend per share (which is typically the same for all of a company’s shares of a certain class) and the price they paid for their shares (which is specific to them).
So £20k invested a year ago ought to be earning roughly £760 in dividends annually.
Anything from Tesco?
That passive income stream sounds good to me – and so does the capital gain. But would Tesco shares be on my shopping list?
For now, the answer is no. I do like the company’s defensive qualities. Its economies of scale, huge customer and loyalty membership base and extensive store network are all strengths I think could help it keep doing well for years or even decades.
But the UK grocery market is brutally competitive, even for the leader. Profit margins are razor thin. They could get thinner yet, as Tesco is squeezed by food and full inflation on one side and consumer belt-tightening on the other due to the conflict in the Middle East.
After the past year’s rise, Tesco’s share price is now 17 times earnings. I do not see that as attractive for a business in a highly competitive industry with low profit margins. So Tesco shares are off my ISA shopping list.
