Tesco (LSE: TSCO) shares are getting quite a bit of attention at the moment. With the stock down from above 270p in mid-August to near 200p today, it’s attracting value hunters.
Would I buy Tesco shares for my own portfolio today? I would, if I was looking to boost my exposure to defensive UK stocks. Here are three reasons why.
Directors have been buying shares
One thing that stands out to me here is that directors at Tesco have been buying stock recently. On 5 October, the CEO, the CFO, and the chairman all snapped up shares. Then, a few days later, board member Byron Grote purchased stock. Combined, these four insiders bought around £250,000 worth of Tesco shares.
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I see this buying activity as a positive development. Insiders have more information on a company than anyone else. They don’t buy company stock if they expect it to go down. These purchases indicate that those within the business believe the stock offers value right now.
Tesco is buying back its own shares
Another thing to like about Tesco is the fact the company is buying back its own shares. Previously, it announced a £750m share buyback programme and, last week, it gave HSBC the green light to repurchase £100m worth of shares on its behalf, as part of this overall programme. This also suggests management believes the stock offers value right now.
Share buybacks are positive because they reduce the number of shares on issue, which leads to higher earnings per share. This can help support a company’s share price.
There’s a big dividend on offer
Finally, there’s the big dividend yield. After the recent share price fall, Tesco’s prospective yield now stands at around 5.1%. I think that’s hard to ignore in the current environment. Dividend coverage (the ratio of earnings to dividends) is solid at around two times, which indicates that the chances of a dividend cut are quite low.
On the topic of dividends, it’s worth pointing out that Tesco recently hiked its interim payout by 20.3%. This large increase indicates that management is confident about the future.
Attractive risk/reward
Now, of course, there are risks to consider here. One is competition from Aldi and Lidl. With consumers looking to cut costs, Tesco could potentially lose market share to the discount players in the years ahead.
Another risk is debt. At the end of February, Tesco had net debt of £10.5bn on its balance sheet. This is not ideal in a rising interest rate environment. Higher interest payments could hit profits.
However, with the stock currently trading on a forward-looking P/E ratio of less than 10, and offering a 5%+ dividend yield, I like the risk/reward proposition here. So I’d be comfortable taking a small position in Tesco today.
