Tesco – 313p

While we still believe that it will pay to be cautious about investing in the stock market in the short term, it is worth pointing out that some very high quality companies are priced at attractive levels. Those with a longer term attitude to holding shares may be willing to risk prices moving even lower in order to ensure that they do not miss what look like very good entry points for some companies. A business which may see more resilient financial performance than most during the downturn is Tesco.

Clearly, the nature of Tesco’s business means that its customers will continue to spend on a regular basis. No matter how bad the recession ultimately becomes, people will still need to buy groceries. There have been doubts expressed in some quarters as the company’s global expansion may be slower than previously anticipated and even in the UK there could be aggressive competition from discount supermarkets such as Aldi. Despite these valid points, it should be remembered that the sheer size of Tesco will ensure that it continues to thrive.

Although the company is at times unpopular, for example when it comes under scrutiny for the demanding terms it imposes on suppliers, Tesco has an enviable track record. Its earnings growth in recent years has been remarkable for a company which is, at the time of writing, the 11th largest FTSE 100 constituent by market capitalisation. Last year group sales burst through the £50 billion barrier and underlying profit before tax improved by 11.8 per cent to £2.85 billion. This meant that diluted earnings per share came in at 26.6p and total dividends for the year were 10.9p per share, up 13.1 per cent on a year earlier.

Although growth may now be slower than had been previously forecast, this remains a very solid company. It is understandable that some analysts are now airing concerns, but it is important to take a step back and look at the broader picture. Tesco shares provide a well covered dividend yield of 3.5 per cent even on a historical basis and the nature of the business means that it should continue to progress. The upside appears to significantly outweigh the risk on the downside for anyone looking to invest over the longer term, given that the share price currently represents a multiple of less than 12 times historical earnings.

WARNING: Opinions expressed are the writer’s judgments at the time of writing. The information does not constitute a personal recommendation and readers should seek their own professional advice as to the suitability of the investments.