The FTSE 100 supermarket biggie Tesco (LSE: TSCO) has seen an over 10% increase in its share price over the past year. The release of a strong set of numbers this week sent the Tesco share price spiralling upwards after it had moved sideways through much of September.
In value terms, it is at 275p as I write. It might not immediately appear to be significant, but in my view, it is. The typical Tesco share price chart shows a sharp fall off the cliff in February. This can be misleading because there was no fundamental reason for the fall. It so happened, that the company decided to pay a special dividend and consolidate stock, which led to a dramatic share price fall. And even at the present levels, it is trading below the 300p+ levels prior to February.
Where is the Tesco share price really at?
Keeping this in mind, I looked at its share price chart adjusted for these developments instead. And that revealed that the Tesco share price is actually at multi-year highs now! This sounds particularly good at a time when UK’s supermarkets are in the midst of hectic buyout activity. Its other two FTSE 100 peers, Morrisons and Sainsbury’s, are both being pursued by bidders.
But Tesco, which is the biggest supermarket in the UK, is not anywhere near this, probably because of its strong performance. In the first half of 2021-22, it reported an almost 6% increase in revenue compared to the same time last year. And its pre-tax profits grew by a massive 107%.
Based on these numbers, the grocer has revised its guidance for adjusted operating profit for the full year. It is no wonder, then, that its share price is rallying even though it has a price-to-earnings (P/E) ratio of 18 times. This is not the highest among FTSE 100 stocks, but it is clearly not among the lowest either.
Dependable FTSE 100 stock
But then again, Tesco boasts of advantages that many other stocks do not have. As a grocer, its sales are relatively predictable even during uncertain economic times, like now. The company has also managed strong performance while its peers have struggled. This gives confidence to me in its management, which clearly knows how to steer the ship.
Also, I like that it has consistently paid dividends for the past few years. Its dividend yield is a tad below the FTSE 100 average of 3.5%, at 3.4%, but based on its latest results I reckon that continuity in the same is likely, which counts for something.
What I’d do
I have been and am still concerned about how rising cost pressures will affect it. I am not sure how much pricing power it has, so along with supply chain blockages like the shortage of lorry drivers, it can impact the company in the future. Yet, it appears confident in its results update and is clearly very well managed so far. It intends to increase productivity to offset inflation and also mentions derivative contracts that hedge the risk.
It is a buy for me.
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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Morrisons and 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.