The Tesco (LSE: TSCO) share price has surged in recent months. Buoyed by the company’s growing profits and takeover speculation in the rest of the sector, the stock’s produced a total return of 15% since the end of June. Over the past 12 months, it’s returned -1.8%.
The stock’s recent performance stands out in contrast to its long-term record. Over the past decade, the stock’s returned -3.3% per annum, including dividends.
I can trace this poor performance back to a couple of factors. First of all, the company’s accounting scandal in 2014 took years to put right. It’s only recently regained the market’s confidence.
At the same time, the group’s been fighting a bitter war with sector rivals. Discount retailers have chipped away at its market share and profit margins.
And then, there have been the challenges of Brexit and the pandemic. These events have layered extra costs on the business, slowing down its return to growth.
However, it now looks as if the enterprise is beginning to put these challenges behind it. As such, I think the outlook for the Tesco share price can continue to improve.
I think it’s fair to say 2020 was a year no retailer wants to revisit. Even though supermarket retailers such as Tesco saw an uplift in sales as other ‘non-essential’ stores were forced to close, they still had to contend with the challenges of the pandemic.
These brought with them extra costs, which consumed virtually all of their additional profits.
At the same time, Tesco had to contend with the additional challenges of Brexit. It’s to be hoped (but not guaranteed) that we’re through the worst of these challenges, and management can now focus on the group’s growth once again.
On this front, Tesco has tremendous potential. The company has been doubling down on its consumer offering in recent years. The launch of the Clubcard Plus scheme and additional investments in online deliveries, as well as in-store, are resonating with consumers.
For the 13 weeks to the end of May, total group sales in the UK and Republic of Ireland increased 8.7%, compared to 2019 levels on a like-for-like basis. Online sales were up 82%.
Tesco share price growth
Growth may have slowed as the economy’s reopened, but I think the firm’s still in an excellent place to continue to expand. This should drive the Tesco share price higher.
Management’s looking to generate around £1.4bn a year in free cash flow from operations. This will provide the enterprise with additional capital to invest in growth and potentially increase shareholder returns.
As well as the company’s growth potential, the stock also supports a dividend yield of 3.9% at current levels.
Based on all of the above, I think the Tesco share price can keep rising. That’s why I’d buy the stock for my portfolio today.
However, I’m well aware that the group may face challenges as we advance. These could include higher labour and food costs, which it may not be able to pass on to consumers. Competition in the food sector may also mean its customers start to shop elsewhere.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.