The Tesco (LSE: TSCO) share price is on a roll. It’s up 26.38% over the last year, despite rising food prices and the cost-of-living crisis. That’s a pretty good return from the nation’s biggest grocer, with the FTSE 100 as a whole up a modest 3.51% over the same period.
I am genuinely, positively surprised. I thought Tesco’s shares would continue to flounder, as inflation eats away at consumer spending power, while Aldi and Lidl grow and grow. Yet its interim results, published on 4 October, show it still has plenty of bite, with group sales jumping 8.9% to £30.75bn, and adjusted operating profit up 14% to £1.48bn.
An impressive comeback
Tesco posted strong growth both in its Finest range and own brand products. Chief executive Ken Murphy reckons it should get a further boost as food inflation continues to decline in the second half of the year.
Tesco deserves its success after taking the fight to the discounters, with its Aldi Price Match on more than 650 lines, over 1,000 Low Everyday Prices locked into January 2024, and a host of exclusive Clubcard Prices deals.
Management has also turned the cost-of-living crisis to its advantage, by winning customers from premium retailers for 13 consecutive periods.
Its success bodes well for the dividend, with strong retail free cash flow of £1.37bn. The latest payout is comfortably covered twice by earnings. Tesco shares are now forecast to yield 4.11% in 2024 and 4.60% in 2025. The stock still looks good value, trading at just 11.8 times earnings.
Despite its recent share price success, I don’t think I’ve missed my chance here. It looks like interest rates have peaked – whatever Bank of England governor Andrew Bailey says – and that bodes well for 2024.
Wages have risen strongly this year, which will have fed through to sale. Perceptions are important and Tesco appears to have shaken off the aura of decline, that set in during Philip Clarke’s ill-starred tenure.
Take it to the till
Naturally, there are risks. Shoppers are still strapped for cash. We cannot yet be sure that interest rates have peaked. Tesco isn’t just a UK operation, it has offshoots in eastern Europe, where Hungary has struggled.
Another worry is that GLP-1 weight-loss drugs like Ozempic will change our eating culture, hitting food and drink sales. Another issue is that cut-throat competition has taken its toll on profits margins, which remain a wafer thin 2.3%.
Yet Tesco feels fresh and fruity again. Investors should reap the rewards with a steady stream of dividends and share buybacks on top. Since October 2021, the company has bought almost £1.6bn worth of its own shares. This looks set to continue, which reflects “the strength of our balance sheet and our confidence in delivering strong future cash flows”.
I’m confident, too. Tesco could be a great way to play the recovery if interest rates really have peaked. Would I call it a screaming buy? That’s quite a high benchmark for any stock but my answer is yes, I would, and hope to buy it myself when I have the cash.
