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A £2,435 Reason To Consider Selling Tesco PLC Today

Tesco

Yesterday’s news that Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US), J Sainsbury, Asda and Wm Morrison all continued to lose market share to Aldi and Lidl last month prompted me to look again at my holding of Tesco shares. Are they justifying their place in my portfolio?

Tesco’s income credentials are well known — its dividend has risen every year for 29 years, and the firm’s shares currently offer an above average yield of 4.2%. For income investors with no intention of ever selling, it’s a good stock.

However, most investors look for a blended mix of income and capital gains — known as total return — and in this regard, Tesco has failed badly.

Would you like £19,761 or £22,196?

According to Morningstar data, Tesco has delivered an annual total return of 7.0% over the last ten years, compared to 8.3% for the FTSE 100. That may not sound like a big difference, but over ten years, it is.

If you’d invested £10,000 in a FTSE 100 tracker and in Tesco shares ten years ago, and reinvested all of your dividend payments, your FTSE tracker would be worth £22,196 today — £2,435 more than your Tesco shares, which would be worth just £19,761.

Tesco is a FTSE laggard

Although Tesco’s share price has more or less recovered from its slide last year, it remains a dismal 23% below its 2007 peak.

The FTSE 100 has risen by 52.7% since November 2008, but Tesco shares have gained just 7.7%, highlighting the supermarket’s status as one of the FTSE’s premier league laggards.

What about the turnaround?

In Tesco’s interim results, the firm said that it was seeing a 3%-5% increase in sales in its refurbished large stores, and that these stores were also delivering improved profit margins.

Despite this, Tesco’s half-yearly figures showed that the firm’s operating margin fell from 6.4% during the first half of 2012 to just 4.9% during the first half of this year.

In my view, it’s too early to say whether Tesco’s UK turnaround will be a success, but it is worth remembering that Tesco remains the UK’s biggest supermarket, with 29.8% of the grocery market, compared to less than 4% for each of Lidl and Aldi, and 17.2% for Asda, which is Tesco’s largest competitor.

I wouldn’t bet against a Tesco turnaround, but I’m not so sure about whether it will result in improved returns for Tesco shareholders.

An alternative to Tesco

I've been looking at high-yielding alternatives to Tesco, with superior records of capital gains. One share I've found has outperformed the FTSE 100 over the last ten years, and offers a 5.4% prospective yield.

This stock is reviewed in detail in a new Motley Fool special report, "Today's Top Income Stock". The Fool's analysts believe this share may currently be undervalued by 10%, and its income credentials are amongst the best in the business.

If you'd like to know more, click here to download your free copy of this report immediately, while it's still available. 

> Roland owns shares in Tesco but not in any of the other companies mentioned in this article. The Motley Fool owns shares in Tesco.