With the economic outlook showing few signs of improving, investments that perform well in such conditions seem a better bet. Defensive stocks are one of those investments, and tesco (LSE:TSCO) shares look particularly interesting at the moment.
Shares of the retail giant have been on a good run lately, up 23% in about a year, along with a nice dividend. Are the good times likely to continue for the supermarket?
I’ll start by addressing the big story here. Still, some might call it a story. Some might call it a scandal. I refer to accusations of speculation or “greed”, as supermarkets have been raising prices above already high levels of inflation.
Critics claim that such price increases are unjustified. They accuse large companies of taking advantage of a public accustomed to seeing prices rise by raising prices more than necessary to cover costs.
Tesco denies the claims. The firm points to its reduced margins and net income as evidence. On the other hand, it made billions last year, increased dividends and began a £750m share buyback. When so many people see their weekly grocery bill skyrocket, fantastic financial results will never be a good look.
Let’s ignore the potential ethical hurdle for a second and move on to the investment argument. Are Tesco shares a good buy for shareholders? And could they even be the best defensive shares in the FTSE 100?
Good and bad
Well, the dividend forecast looks respectable. Analysts predict a 4.5% return by 2024 and a new increase for 2025, which places the dividend above the FTSE 100 average. In most years, that would be an attractive return, but high interest rates mean I can get over 5% on savings accounts right now. So while it’s still a decent payout, I’d like to see more than just dividends to make it worth it.
When it comes to the retail sector, Tesco is a dominant player. The store has a 27% market share in the UK, where the next biggest competitor Sainsbury’s It only has a 15% stake. Tesco’s size offers advantages over its rivals in economies of scale and branding.
It must also be acknowledged that Tesco has retained its market share despite the rise of budget supermarkets such as Aldi and Lidl. It’s impressive to see how the store is maintaining customers during the cost of living crisis, although it remains a question whether the company can continue to attract budget-conscious shoppers.
The hugely popular Tesco Clubcard is perhaps part of the store’s appeal. On the one hand, its 20 million members receive discounts and offers in exchange for loyalty to the supermarket. On the other hand, I think the store might be putting too much pressure on your Clubcard.
A purchase?
On a personal note, I find it irritating to scan my Clubcard every time I get to the checkout. And when I’m price-conscious enough to make the effort, the “special” prices are sometimes the same as the standard price at other stores. Negative customer experiences like this could cause buyers to spend their money elsewhere.
In total, I see more complaints here than the last time I wrote about Tesco. I own the shares and am not motivated enough to sell them, but I would be reluctant to buy them given the numerous issuances at the moment.
