Supermarket chain Tesco (LSE: TSCO) is a popular FTSE 100 stock held by many private investors. But some might have been disappointed by the multi-year performance of the share price.
In 2012, the stock was above 400p. So today’s price near 259p represents a decline of just over 35%. And that’s not the type of long-term performance investors expect from any shareholding. After all, given a stable underlying business, most share prices rise as revenues and earnings merely keep pace with price inflation.
Historical operational problems
But Tesco’s business hasn’t been stable. In fact, it’s endured a number of operational problems over the past decade or so. For example, it’s retreated from many of its overseas operations. And it dropped the ball regarding the UK home market leading to plunging profits and loss of market share. The turnaround from that chaotic situation has been well-reported over the years.
Even today, the business operates in a competitive market with the ongoing threat to its market share from lean players such as Aldi, Lidl and others. But, in fairness, the company has been holding its own quite well recently. And over the past year, the share price is only about 5% down after recovering from its autumn lows of last year.
But the business is going to have to go some to get the stock back up to 400p. And the signs don’t look too promising right now. Indeed, one thing drives share price more than anything else and that’s earnings. But City analysts are not optimistic and they’ve pencilled in a 13% decline for the trading year just finished to February. And they expect an outcome just below flat for the current trading year.
And the outlook for shareholder dividends isn’t any better. Those analysts have pencilled in low single-digit percentage declines ahead. And that means Tesco fails one of my tests for a dividend-led investment. I want my shareholder payments to enjoy backing from a business capable of increasing its revenue, earnings, cash flow and dividends a little each year.
Maintaining market share
Meanwhile, the forward-looking dividend yield sits just above 4% for the current trading year. But I’ve long said I want a yield of at least 5% from Tesco to compensate me for the risk of holding the shares. After all, Tesco is a high-turnover, low-margin business operating in a cutthroat market while carrying what looks like too much debt. And as such, I see its earnings and dividends as vulnerable to easy damage if market conditions should shift a little.
However, there are positives. In January, Tesco delivered a decent set of third-quarter figures covering the Christmas period. And the directors said the business is maintaining a “strong” market share of 27.5%. But on top of that, Tesco was the only full-line grocer to increase its market share compared to pre-pandemic figures.
The company also has a penchant for buying back its own shares. And that habit may work to push the share price higher, over time. But if the stock is to get back to 400p, I reckon it needs all the help it can get.
