The market is warming to supermarket group Tesco (TSCO) as it is showing the right qualities to cope with competition from discounters Aldi and Lidl. We think now is the perfect time to get on board as the shares are not expensive on 14.1 times prospective earnings and a 3.1% prospective dividend is the cherry on top.

It remains the dominant force in UK groceries and, given present economic uncertainties, we think the defensive element to food retailing is a huge positive and should underpin the share price should markets be rocked again going forward.

Forecast-beating full year results (10 Apr) revealed group sales up 11.3% with a boost from wholesale operation Booker and like-for-like sales up 2.9% in the core UK and Republic of Ireland business, representing a third full year of growth.

Operating profit grew an impressive 33.5% to £2.21bn and, reflecting confidence in its continuing cash generation, Tesco nearly doubled the full year dividend to 5.77p.

Following a fruitful four years in the hot seat, chief executive Dave Lewis said ‘we have met or are about to meet the vast majority of our turnaround goals’. Significantly, the second half operating margin achieved sat well within Tesco’s 3.5%-to-4% targeted range.

At next month’s capital markets day (18 June), Tesco will share some of its ‘untapped value opportunities’ with investors as it moves beyond the turnaround phase. This investor event could prove a catalyst for some bullish analyst commentary, hopefully nudging the shares higher still.

Offering exposure to the growing convenience and online channels, Tesco’s competitive position has been strengthened by the Competition and Markets Authority’s decision to block the mega-merger between Sainsbury’s (SBRY) and Asda, a deal that would have seen the combined entity leapfrog Tesco in market share terms.

For now, Tesco’s position as the UK’s biggest grocer remains secure. The retailer commands a 27.3% share according to the latest Kantar data, ahead of Sainsbury’s with 15.4%, Asda on 15.2% and Morrison (MRW) with a 10.3% slice of the pie.

Given cut-throat competition and a looming threat from Amazon, Tesco needs to stay vigilant. It is also cutting the number of products it sells as it fights back against the rapidly growing discount duo of Aldi and Lidl, which speak for a combined 13.6% of the market.

In a further fine tuning of its activities, Tesco Bank has announced (21 May) it has ceased new mortgage lending and is ‘actively exploring options’ to sell the existing mortgage portfolio.

This decision demonstrates welcome capital discipline from Tesco; if a business line isn’t profitable, Lewis won’t squander further funds in its pursuit. That approach should be applauded.

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