If I’d invested £5,000 in Tesco (LSE: TSCO) shares at the beginning of 2023, I would have made around £1,250 in profit today. That’s an impressive 25% gain. But will this performance continue in 2024 and beyond?
The business has faced multiple headwinds in the last few years. Against a backdrop of high inflation, I’d expect that many investors expected Tesco to struggle. However, it managed to withstand all challenges thrown its way. There’s no doubt 2024 will be another tough test. So, should I be buying the stock today?
Passive income
I like the idea of being able to generate extra cash alongside my investments without doing much work. As such, I like the look of Tesco’s 3.6% dividend yield. Now, that’s by no means the most attractive yield out there. Vodafone, the largest payer on the FTSE 100, offers over three times that with a yield of 11.1%. However, there’s an argument that Vodafone’s dividend isn’t sustainable. With Tesco’s covered around two times by earnings, I’m fairly confident it will pay out.
Dividends are never guaranteed. That said, Tesco has also looked to return extra value to shareholders in recent times. Last April, the firm initiated a £750m share buyback scheme finishing in April this year. By then, the business would have bought back a cumulative £1.8bn in shares since October 2021.
Rising threat
The biggest threat Tesco faces is competition. This largely exists in the form of Aldi and Lidl, which can’t be ignored, however successful Tesco is. In the last decade or so, the German budget supermarkets have risen to prominence and stolen market share from the supermarkets giant. This has only been amplified by the cost-of-living crisis. Both stores saw growth in 2023. Last year, Aldi welcomed over 1m new customers. It recently opened its 1,000th UK store and has plans to open a further 500.
Still number one
Nevertheless, Tesco remains the number one player in the field, with a market share of 27.2%. That’s got to be worth something, right? Yes, its size gives it advantages in scale and brand recognition over rivals. The rise of budget competitors is impressive, but Tesco still operates over 4,000 stores in the UK and Ireland. It, like its counterparts, is also looking to expand. In Ireland, it plans to spend €80m on eight new store openings.
What also excites me about Tesco is the growth of its online business. It’s no secret that customer habits are shifting to online. Last year these sales made up 13% of overall sales, that’s a 10% growth rate year over year.
What’s in store?
So, what could the next 12 months and beyond see Tesco?
Its shareholders will be hoping for more of the same. And at its current price, I’d be tempted to open a position. Rising competition will continue to be a threat. But I think Tesco is capable of staving off rivals. The extra income I’d receive is a nice touch too. If I had the spare cash, I’d snap up some shares.
