A lot of people might not see Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) as a great investment right now.
After all, the UK’s biggest supermarket has had a tough couple of years, losing ground to its nimbler competitors — and nobody is seriously expecting a return to earnings growth before 2016 at the earliest.
Share price down
On top of that, the share price has tumbled — it’s down more than 10% over the past 12 months to today’s 334p, while the FTSE has gained around 7%.
But I reckon such folks are wrong. Very wrong.
On any timescale, Tesco looks like a solid investment to me, which is why I have it in the Fool’s Beginners’ Portfolio.
We’re looking at steady dividend yields of around 4.5% from a share on a price-to-earnings (P/E) ratio of only about 11 — that’s a higher-than-average dividend from a share on a lower-than-average valuation.
Safety is the key
And it’s in a business that is one of the safest around. Market share between the big supermarkets might vary by a couple of percent every now and then, but with the market saturated and all the best supermarket sites already taken, that’s just tinkering at the edges — Tesco’s share of about a third of the market looks solid for decades to come.
And that’s why I reckon Tesco is especially suitable for an ISA investment.
Come April, we’ll have a whole new allowance of £11,760 to use up, and I really think the best way to use it is to look for suitable “long term buy and forget” shares — tuck away as much of an ISA’s worth as you can every year, and by the time you retire you should have a healthy pile of cash at your disposal.
What might an investment in Tesco be worth?
Shares beat cash
Well, consider that a typical savings account paying 1.7% interest would turn an investment of £1,000 into £1,400 in 20 years’ time, what do you reckon the same investment in Tesco would be worth, assuming the stock market grows at 5% per year in line with its historical average and that your 4.5% dividend each year is reinvest in Tesco shares?
How does £6,100 sound?
And Tesco’s current troubles and low share price? That just means you’ll have picked up a bargain along the way.