Shares in Tesco (LSE: TSCO) have had a cracking year. In the last 12 months, they’re up 19.9%. That’s impressive in itself. But even more so when you consider the current economic climate.
In all fairness, I’m not too surprised. Tesco is a stalwart in its industry. In fact, it’s the leading player in its field. Could it be a smart buy going forward for investors looking to snag some defensive stocks?
What is a defensive stock?
But what exactly do I mean by a defensive stock?
Well, they’re stocks that have low volatility and their share prices tend not to move too much. They have a stable underlying business, and they tend to be less impacted by the ups and downs of the wider economy. Tesco, which provides essential products for everyday use, is a prime example.
A smart play?
The last few years have been incredibly volatile. So, does that mean Tesco is a stock worth buying today? In my opinion, yes.
The firm has posted some strong results in recent times, showing its resilience. Most recently, its latest trading update highlighted that like-for-like sales jumped nearly 10% in the four weeks before the festive period. For Q3, sales increased by 7.3%.
It’s also expected to continue growing sales in the years to come. For FY2025, revenue is predicted to reach £70.3bn. That’s a solid rise on the £65.8bn in FY2023.
Alongside that, it also offers us income investors a great opportunity to generate some extra cash on the side. It currently yields 3.7%. Now, that’s by no means the highest on the FTSE 100. However, the business has looked to return value to shareholders in recent years, which is something I like to see.
For example, by April, Tesco would have bought back a cumulative £1.8bn worth of shares since October 2021. Some City analysts also predict its yield to rise to over 4% in the years to come.
Things to consider
While I’m bullish on Tesco, there are, as always, a few things to consider.
The most important of these is rising competition. Budget supermarkets such as Aldi have become increasingly popular in the last few years. This has only been intensified by the cost-of-living crisis. Last year it welcomed over 1m new customers. And after opening its 1,000th store in the UK, it has plans for a further 500.
That’s impressive growth. Should it carry on, I’m wary it may steal market share away from Tesco.
I’d still buy
Yet Tesco is fighting back against these fast-growing competitors. It’s investing heavily in new store openings as well as growing its online business. That shows its intention to remain number one in the field. Its UK market share grew to 27.9% leading up to Christmas, so it seems to be working.
With that, if I had the spare cash, I’d open a position in Tesco. A defensive stock with a meaty yield and strong growth prospects? I like the sound of that.
The post Are Tesco shares the best option available to defensive investors? appeared first on The Motley Fool UK.
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Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco Plc. 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.
