Tesco (LSE: TSCO) shares have had a nice start to the year. While the wider FTSE 100 struggles to get going on its 40th birthday, the supermarket stock is already up 2.45%.
This momentum builds on the terrific performance of last year, when we saw a 27% gain in the share price.
Here, I’ll look at how much I’d need to invest in Tesco stock to try and bag two grand of annual passive income.
A festive winner
According to data just out from market researcher Kantar, Tesco had a very solid Christmas period. Over the 12 weeks to 24 December, the company’s sales rose 7.5%.
Aldi and Lidl reportedly grew sales even quicker, increasing their combined market share to 17%. Clearly, these discounters continue to benefit as shoppers try and offset price inflation.
However, not at Tesco’s expense. Its own market share edged up 0.1 percentage point to 27.6%. This once again confirms how great the firm is at protecting its industry-leading position.
Its Clubcard keeps customers loyal (myself included) and the Aldi price-matching campaign looks to be working as it constantly reminds shoppers of its competitiveness on value. Its Tesco Finest range is also increasingly popular.
Meanwhile, I reckon its grocery delivery service is an often overlooked competitive advantage, as the discounters are well behind in this area.
We’ll have to wait until 11 January when Tesco reports its trading figures to find out how all this translated into revenue and profits.
Intense competition
The data also suggests arch-rival Sainsbury’s was the standout winner over the festive period whereas Asda, Morrisons and Waitrose might not have fared as well.
All these names do highlight just how competitive the UK supermarket landscape is. I haven’t even mentioned Marks & Spencer or Amazon, which still has big ambitions in groceries.
Then there’s new potentially disruptive business models like HelloFresh. However, I do think Tesco could replicate a similar meal-kit offering and bolt it onto its deliver service, if it wanted to.
One consequence of all this though is that Tesco’s margins are likely to remain thin. And if there was ever a whiff of losing significant market share, the share price would likely suffer immediately. So mounting competition is a key risk.
That said, I think Tesco has a trio of competitive strengths — the loyalty programme, delivery service and powerful brand — that will make it very hard to dislodge, as the German discounters are finding.
The forecast dividend yield
So what about this £2,000 of passive income that I mentioned? Well, the current share price is 297p. At today’s forecast dividend yield of 4.3% for fiscal year 2025 (starting at the end of February for Tesco), I’d need to buy 15,620 shares to earn £2k in annual passive income.
Mind you, those would set me back a cool £46,391. That’s a sizeable sum to invest in a single stock when dividends aren’t certain.
However, I note the payout is covered two times by anticipated earnings. That’s widely seen as a healthy level of coverage, suggesting the dividend isn’t in peril.
Given this, I think Tesco shares could play a useful part in my own income portfolio this year. I’d invest now if I had spare cash, though I’d rather spread £46k around a few different stocks.
