Should I Buy Tesco for My ISA?


LONDON -- Any company that has increased its dividend continuously for 28 years, and offers a FTSE-beating yield of 4.1%, deserves to be taken seriously.

And when you add in annual sales nearly three times that of its closest London-listed competitor, and a leading presence in the home-delivery market, then things look even better.

I am, of course, talking about Tesco , a share I hold in my own ISA, and one that I think is perfect for this tax-efficient method of saving.

You can find out more about the tax benefits of investing through an ISA here. Let's now take a look at the particular attractions of Tesco.

Would you bet against Buffett?
Tesco's size and U.K. market dominance are undoubtedly two of the company's strengths, as is its unbroken 28-year record of dividend increases.

When Tesco issued a profit warning in January 2012, billionaire investor Warren Buffett used the share-price dip as a buying opportunity, and topped up his Tesco shareholding, to give him 5% of the company.

Today, Buffett's Tesco shares are worth around £1.5bn, and will provide him a dividend income of about £60m this year.

Although Tesco's share price has risen recently, it still looks like a good value to me, placing the company on a forward price-to-earnings ratio (P/E) of 11.3, well below the FTSE 100 average of 16.6.

Beneath the bonnet
When you look a little more closely at Tesco's financials, things still look good. Tesco's operating margin of 6.2% is higher than both that of J Sainsbury (3.9%), and Wm Morrison Supermarkets (5.5%).

What's more, despite being the biggest of these three, Tesco is also expected to deliver the most growth this year. Analysts' forecasts suggest Tesco's earnings per share will grow by 5.7% in 2013, compared with 4.8% for Sainsbury's, and a stagnant 0.4% for Morrisons.

Never knowingly undersold?
Finally, a recent report in the Financial Times suggested that Tesco is about to launch a new price-matching scheme, which will issue customers with money-off vouchers at the till if their shopping would have been cheaper at Morrisons, Sainsbury's, or Asda.

It rarely pays to bet against a giant, and I believe that Tesco will overcome its short-term problems, and will continue to pay a rising stream of tax-free dividends into my ISA for many years to come.

2013's top ISA income stock?
If you like the idea of using an ISA to hold high-yielding income shares, then I would recommend you take a look at The Motley Fool's latest free report, "The Fool's Top ISA Income Stock For 2013".

The company in question currently offers a yield of 5.7%, and the Fool's expert analysts believe that the current price of 700p could be 20% below the share's true value. To learn more, just click here to download your free copy of this special report, while it remains available.

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Roland Head and The Motley Fool own shares of Tesco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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