In the run-up to Christmas last year, Tesco (LSE:TSCO) shares seemed in bad shape. In fact, the share price sank below £2.20 on 16 December 2022, amid concerns about squeezed margins and rising competition.
Yet, investors on that day could have perfectly timed the FTSE 100 supermarket stock’s 52-week low. Subsequently, in 2023, Britain’s largest grocer has successfully navigated an episode of high inflation and held off its rivals.
So, what would a £1k investment in Tesco shares at their 52-week low be worth today? And can the company continue to generate strong returns for investors next year? Let’s explore.
Share price rally
Today, investors can buy Tesco shares for £2.82 each. Accordingly, for a shareholder fortuitous enough to invest £1k back in December 2022, their position of 454 shares would be worth £1,280.28 today.
Impressive results have underpinned the growth in the firm’s share price. In H1 FY23, Tesco delivered an 8.9% improvement in group sales to £30.75bn and adjusted operating profit increased 14% to a little over £1.48bn. That’s no mean feat in a cost-of-living crisis.
Looking ahead, the company’s keen to preserve its competitive advantage and market share. Investment in 1,100 own brand products as well as its Aldi Price Match and Clubcard Price deals are at the heart of Tesco’s strategy to retain customer loyalty and keep pace with its rivals.
Dividend income
Not only would investors have benefitted from capital growth via share price appreciation, but Tesco offers a handy dividend too. Over the time period, shareholders also benefitted from £49.48 in dividend income, bringing their grand total to £1,329.76 today — an impressive +33% return.
What’s more, Tesco’s dividend history is pretty solid. Barring the accounting scandal in 2015/16, investors have been able to rely on regular distributions for over two decades. At present, the stock yields 3.9% and dividend cover stands at two times earnings, indicating a robust margin of safety.
Risks
However, as with any dividend stock, the passive income Tesco provides isn’t guaranteed. Indeed, the supermarket faces some pressing near-term challenges that could threaten the share price trajectory as well as dividend payouts.
Worryingly, the UK’s retail sector doesn’t look healthy. According to the ONS, retail sales volumes dropped 0.3% month on month in October. This follows September’s 1.1% fall.
Considering Britain’s economic growth is currently anaemic and household budgets face further squeezes as high interest rates take their toll, the macro environment for Tesco in 2024 could prove difficult to navigate.
In addition, although the supermarket’s price-matching strategy has helped it fend off competition from German discounters, it has limits too.
Tesco’s market share has held steady above 27%, according to the latest data from Kantar. However, there’s a risk that striving to retain its slice of the market could increasingly put pressure on the company’s margins.
A stock to buy?
Despite the risks, Tesco shares have proved to be a solid investment in 2023 and I believe the supermarket can deliver another good year in 2024. I’m a shareholder and will continue to hold my position.
I’ll be monitoring the company’s results over the crucial Christmas trading period with a view to potentially investing more when I rebalance my portfolio in the new year.
