The Tesco (LSE: TSCO) share price has been moving on up, putting in its longest bull run of the year so far.
It did come off a 52-week low on 13 October though. But from that point, Tesco shares had gained 17% by the end of November. Some of it will be down to the FTSE 100‘s general improvement, but Tesco has grown ahead of the index over the same period.
Buybacks
If investors have started to see Tesco shares as undervalued, they’re not alone. The company itself has been buying them back for much of the year, and has just extended its repurchase plan again.
Tesco is returning a total of £750m through a share buyback by April 2023. And on 29 November, it announce the next stage involving a repurchase of up to £203m in shares.
I see that as a vote of confidence by the board. And it reinforces the cash generative nature of the company. Margins might be squeezed by the economic pinch, but having that amount of surplus cash to return makes the long-term investment case look stronger to me.
Market share
I suspect there are two main reasons for the Tesco share price rise. One is that investors are looking towards Christmas, which is traditionally a good time for supermarket receipts. And according to Kantar, Tesco is holding on to its market share. The UK’s leading groceries retailer still commands 27% of the market, with Sainsbury some way behind on 15%.
The feared onslaught from the cut-price Aldi and Lidl really hasn’t materialised. A lot of that will be down to Tesco’s efforts at price matching, which will cost it some of its margin. But the retailer is big enough and has the financial muscle to take the short-term hit in order to protect its market. I see that as another long-term investment advantage.
Undervalued?
But I reckon the key reason behind the current bullishness is just that investors are finally seeing Tesco shares as undervalued. The worst fears have not come true, and Tesco’s strong defensive nature is showing.
The shares are on a forecast price-to-earnings (P/E) ratio of under 12 for the current year. In more normal conditions, I’d see that as reasonably good value. But right now, at a time when spending and profits are being squeezed across the economy, I find it especially attractive.
Dividend
But the real measure for me is Tesco’s prospective dividend yield, which is close to 5%. That really does suggest to me that the shares are too cheap.
Despite my optimism, Tesco does still face significant risks. If we suffer a recession that lasts a couple of years, I’d expect price competition to escalate. Margins could remain thin for a lengthy period. And, perhaps, we might be entering an irreversible state of lower-margin groceries all round.
So there’s still the opportunity for the competition to eat into Tesco’s slice of the pie. And only time will tell how real is that danger.
