Tesco (LSE: TSCO) shares have offered fantastic returns to investors in recent decades. You’d be hard-pressed to find many better British firms to invest in. Still, the past is the past, and I’ve been looking at what they could offer me looking ahead.
Let’s say I had a £1,000 investment in Tesco shares — what could that be worth in three years’ time?
My first decision is how I’m going to answer this question. Numerous methods exist for finding future returns, none of them guaranteed. As Tesco pays out good dividends, I’ll use these as a starting point to give me a rough idea of what to expect.
| 2023 | 2024 | 2025 | Final | |
| Amount | £1,000 | £1,042 | £1,089 | £1,142 |
| Dividend forecast | 4.15% | 4.55% | 4.89% | |
| Dividend return | £42 | £47 | £53 |
Two important things to point out here are, firstly, that I’ve reinvested the dividends into more shares in the company. And second, forecasts are only predictions and not guaranteed.
My £1,000 turning into £1,142 looks pretty good, though. Importantly, I may have more to come depending on what the share price does over the next three years. I see a few reasons why it might indeed grow.
£750m buybacks
One impact is that of buybacks. Tesco recently announced a £750m buyback of its shares. This will reduce the number of shares in issue and result in each remaining share representing a bit more of the company. The share price should go up to compensate.
A second reason is inflation. Firms that raise their prices with inflation should, in theory, see their shares rise at a similar rate. The reality is a bit murkier, but as Tesco sells essential products that are inflation-resistant, I’d expect some uplift from here.
A third point is share price growth through growth of the company itself. Tesco reported increased revenue for Q1 2024 and earnings are forecast to rise over the coming years as well. With the country’s best Clubcard, I’d say the firm is well-positioned here.
As a counterpoint, the share price of Tesco has been stagnant for around a decade. So while I think there are positive signs to see an upswing, it would have to buck the trend of no growth for a number of years.
Other risks exist too. The supermarket sector is fiercely competitive with budget supermarkets like Aldi and Lidl and higher-end shops like Waitrose and Marks & Spencer. Tesco has its work cut out just to keep its market share, and if it doesn’t, the shares are likely going to go down.
50% increase?
With all that said, what might I expect that £1,000 to turn into? Well, taking everything into account I see a 50% increase as possible over the next three years. That makes the £1,000 into £1,500.
A 50% return would be an excellent return over this timeframe for any company, but I am optimistic here. I do own shares in Tesco already, and I’ll be crossing my fingers that my prediction isn’t far off the mark.
