Tesco (LSE: TSCO) shares have had a surprisingly volatile ride for what is essentially just a supermarket. Or is it? We’ll come back to that below.
But first, I want to think about why Tesco shares dipped a couple of percent Thursday (18 June) in response to what looks like a solid first-quarter trading update.
The company didn’t give us a lot of information, though quarterly updates tend not to. But I’m really not seeing anything negative to be concerned about…
I am pleased with our progress in the first quarter, with customer satisfaction up strongly and continued sales growth building on the exceptional performance we delivered last year.
CEO Ken Murphy, Q1 update, 18 June
Here’s a taste of what Tesco delivered in the quarter…
- Total sales of £16.8bn, like-for-like up 1% with 1.8% growth in UK and ROI.
- Full-year operating profit guidance still strong at £3bn to £3.3bn.
- £341m returned via buybacks, out of £750m to be completed by April 20.
I find the lacklustre reaction to the results a little puzzling, given that I doubt we could have expected much more at this stage. Maybe investors were put off when the CEO spoke of “conflict in the Middle East creating ongoing uncertainty for many households” in his opening statement? Or perhaps everyone’s too excited by Space Exploration Technologies (aka SpaceX) to be bothered with something as boring as Tesco?
What’s the big attraction?
It seems a good time to consider what I see as the main strength for Tesco shares. And that’s its dividend prospects.
We’re looking at a modest forecast yield for the current year of 3.1%. That’s very close to the FTSE 100 average right now. But crucially, I rate it as probably one of the most stable in the index. And Tesco certainly appears to be generating the long-term cash to keep it growing.
With its last set of full-year results, Tesco raised the annual dividend by 5.8%. And a dividend that can keep growing ahead of inflation could ultimately contribute far more to a retirement pot than a bigger, here-today-gone-tomorrow, yield.
So what else is Tesco?
But to get back to my opening question, as well as just filling our shopping baskets, Tesco is also a champion at collecting consumer data and keeping customers coming back for more. To illustrate what I mean, I can’t do better than quote someone close to home…
The Tesco Media & Insight Platform captures about 58% of the British population each week, on par with Facebook and ahead of Sky in media reach terms. Analytics subsidiary Dunnhumby reports that multichannel campaigns on Tesco Media generate an average return on ad spend of £6.60, versus £3.80 on other channels.
Mark Hartley, The Twelfth Magpie
What should we do, then?
So is this a good time to consider buying Tesco shares? I actually think it always is, for investors with a long-term horizon. And I see a decent safety moat in case of future stock market falls. I expect many investors, though, will still keep being distracted by bigger headline dividend yields — like me.
Should you invest £5,000 in Tesco Plc right now?
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And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Tesco Plc made the list?
Alan Oscroft does not hold any positions in the companies mentioned.
