All things considered, the Tesco (LSE: TSCO) share price had an excellent 2023. And that positive momentum has continued into 2024, helped by Thursday’s (11 January) encouraging update on trading over the festive period.
Guidance raised
Like-for-like sales rose 6.8% in the six weeks to 6 January and 9.2% in the four weeks before the festive period. That’s hardly a bad result considering many in the UK are still reeling from the effects of higher interest rates.
Given the hyper-competitive industry in which it operates, investors will also be cheering news that the company is taking the battle to rivals. Tesco’s market share rose to 27.9% in the four weeks to Christmas. It also claims to have been the cheapest of the ‘Big Four’ grocers for more than 14 months.
Having delivered this strong performance, guidance for the full financial year has been raised. Retail adjusted operating profit of around £2.75bn is now predicted, slightly more than the £2.6bn — £2.7bn previously penciled in.
All this leaves the Tesco share price sitting near a 52-week high.
More to come?
Of course, there’s always a chance that trading could surpass even Tesco’s upgraded guidance, especially if the next inflation reading comes in below estimates and shoppers become more relaxed with their spending.
There’s also an argument that Tesco shares will remain popular due to the dividend stream. As things stand, the stock has a forecast yield of 4.3% for the next financial year (beginning in March). That’s more than I’d get from a fund that tracks the return of the FTSE 100 index to which Tesco belongs.
There are higher dividend yields out there. But the bigger the cash returns get, the greater the risk that they might be cut. Put another way, if it looks too good to be true, it probably is.
Knowing that Tesco’s payouts are likely to be covered twice by earnings makes it far more likely I’d buy here over a stock like Vodafone. The latter’s 10.4% payout isn’t even covered by profit!
What could go wrong?
For balance, it’s worth considering what things may weigh on sentiment. One argument is simply that a lot of the good news is priced in.
Supporting this, the stock’s valuation puts the company at the more expensive end of the consumer defensives sector. This may be why the latest trading update hasn’t generated a jump in the share price.
Traders may want to bank some profit too. Indeed, an interest rate cut later this year could push the market into a risk-on attitude, where established companies are jettisoned for racy blue-sky bets.
Oh, and it’s worth reminding myself that no dividend stream is ever guaranteed. As evidence of this, let’s not forget that payouts at Tesco were cancelled a few years ago due to an accounting scandal.
Safety in numbers
Predicting where a company’s shares may go in any one year is a fun but ultimately fruitless endeavour. No one truly knows where they will be by the end of 2024.
However, I would consider buying this stock today if — and this bit is important — I were concerned more with generating passive income than capital gains.
Tesco shares surpassed my expectations in 2023. But I wonder if the big profits have already been made.
