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Tesco (LSE: TSCO) shares are moving higher right now. It seems investors were happy with the company’s H1 results, which were posted on Wednesday (4 October).
Are the shares worth buying today? Let’s discuss.
Strong H1 figures
Tesco’s interim results were certainly impressive.
For the 26 weeks ended 26 August, group sales were up 8.9% year on year, with retail like-for-like sales up 7.8%.
Meanwhile, adjusted diluted earnings per share were up 16.8% to 12.26p.
Looking ahead, the FTSE 100 company raised its guidance for the full year. It now expects to generate a retail adjusted operating profit of between £2.6bn and £2.7bn versus previous guidance of £2.5bn.
A lot to like
Looking beyond these H1 results, I think there’s a lot to like about Tesco shares right now.
For starters, they’re ‘defensive’ in nature. What I mean by this is that revenues and profits are unlikely to suddenly fall off a cliff if we see an economic deterioration. This is a valuable attribute at the moment as there is a lot of economic uncertainty.
There’s also a nice dividend yield on offer. Currently, the forward-looking yield is about 4.2%.
It’s worth noting that Tesco didn’t raise its interim dividend (3.85p) in its H1 results, which was a little disappointing. However, analysts expect the full-year payout to be up year on year.
Share buybacks are another plus. In H1, Tesco purchased £503m worth of its own shares. Buybacks tend to boost earnings per share over time.
Finally, the valuation seems very reasonable. At present, the forward-looking price-to-earnings (P/E) ratio using the consensus EPS forecast for this financial year is about 12. And this may fall in the weeks ahead as analysts raise their EPS forecasts after the increase to guidance (assuming the share price doesn’t take off).
I’ll point out that analysts at HSBC recently raised their share price target to 340p, so they clearly believe the shares can move higher from here.
Interest rate risks
On the downside, higher interest rates pose a bit of risk here.
At 26 August, Tesco’s net debt stood at around £9.9bn. That equates to a net/debt to EBITDA (earnings before interest, tax, depreciation, and amortisation) ratio of around 2.3, which is getting up there.
Having a big pile of debt on the balance sheet isn’t ideal in a ‘higher-for-longer’ interest rate environment.
Higher interest rates are also hitting a lot of consumers. This may lead to more consumers turning to budget supermarkets like Lidl and Aldi. Tesco is working really hard to lower its prices, however, and its amazing Clubcard deals should help here.
My view on Tesco
Weighing everything up, I do like Tesco shares as a defensive play right now.
If I was looking to boost my exposure to defensive stocks (I already own a few including Unilever and Reckitt), I would certainly consider investing in Tesco.
