Why I'm a Long-Term Investor in Tesco

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LONDON -- Back in 2009, as stock markets recovered from a slump that had seen the FTSE 100 dip below 3,500, cheap shares abounded. And believe me, I was buying.

But one share attracted me more than most: Tesco  (LSE: TSCO  ) (NASDAQOTH: TSCDY  ) , where the market's collapse had seen the share price fall from 470 pence or so at the market's peak to below 300 pence at its nadir. And at that price, the stock's yield was bringing it to the attention of income investors -- a remarkable feat, given that for 20 years, Tesco had been that rarest of things: a go-go growth stock with defensive properties.

So as soon as fresh funds became available, I bought. And I've been buying ever since -- especially so after the abrupt fall in the share price following the profit warning of a year ago.

I stuffed the shares in my pension at 314 pence, and the biggest purchase inside my ISA was this summer, when the price -- once again -- dipped below 300 pence to reach 298 pence.

Of course, I wasn't alone. Tesco has proved a popular pick with other investors -- notably Warren Buffett, who took the opportunity of the 2012 price fall to top up an existing holding. He now holds around 5% of Tesco, worth around 1.5 billion pounds at today's share price.

Other investors have sold out, though, seeing the Tesco story as past its sell-by date. Neil Woodford was one such, pulling the plug on his holding at around the same time that Buffett topped up his.

And private investors have been selling out of Tesco extensively in recent days, seeing a share price of 375 pence as an opportunity to take profits. Certainly, if they bought in during last June's brief dip below 300 pence, they'll have cleared a 25% return in a little over six months.

I'm holding, though. And I intend to remain an investor, with a comfortable five-figure holding split between my ISA and SIPP.

I reckon that Tesco has several charms for the long-term investor.

  • Tesco is the world's third-largest international retailer, with operations in 13 countries -- including China, South Korea, India, Turkey, Hungary, and Poland. Reassuringly, fully one third of earnings come from overseas.
  • Tesco's U.K. operations are extensive, embracing almost 3,000 stores. It is the country's largest retailer, and has a bigger share of the British grocery market than Sainsbury and Asda put together.
  • It's not just a physical retailer: The company has extensive interests in catalog shopping, banking and insurance, telephone services, travel, and home furnishings.
  • Tesco is investor-friendly, with a progressive dividend policy that's raised its dividend for 25 years.
  • There's considerable hope that Tesco's much-hyped problems are behind it. One billion pounds is being spent on improving the offering of its U.K. stores, while the loss-making U.S. venture is the subject of a strategic review that could see it closed or sold.  

Bottom line
For me, these qualities are attractive, and I plan on being a long-term investor in the company, and see it as a core part of my retirement strategy.

Better still, even after the recent rise in the share price, Tesco is still an attractive buy, offering a forecast yield of 4.2% on a prospective P/E of just over 11 -- barely indistinguishable from the average P/E of the market as a whole.

Put another way -- particularly for income investors -- Tesco can be regarded as a premium stock trading on a distinctly non-premium price.

Opportunity knocks
Of course, Tesco isn't the only attractive income-generating company in the FTSE 100. And another blue chip, in a very different line of business, has just been declared "The Motley Fool's Top Income Stock for 2013."

Intriguingly, the share in question offers a 5.7% income and might be worth 850 pence vs. around 700 pence now. Just click here to download our analysis -- as I say, it's free.


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Related Tickers

5/27/2016 3:59 PM
TSCDY $7.29 Down -0.10 -1.29%
Tesco CAPS Rating: ****
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Tesco CAPS Rating: No stars