Tesco (LSE: TSCO) shares have been on a roll in recent months. They’ve easily beaten the FTSE 100 market, which has basically gone sideways.
Here, I’ll look at how much I’d have now if I’d invested £10k in shares of the UK’s leading supermarket just half a year ago.
I’d be doing well
Six months ago, the Tesco share price was 260p (£2.60 per share). As I write, the shares are going for 298p (£2.98). This means they’ve appreciated by around 14.6%.
Therefore, my 10 grand investment would now be worth £11,450. That’s obviously a very decent return in just half a year.
But it’s also not all, as Tesco pays dividends twice a year too. And I’d have caught one of those — the interim dividend — in this period. That payment was 3.85p per share, which would have given me an extra £148.
The dividend prior to that (the final), which I would have missed, was 7.05p per share and paid out in June. The next final payment will likely be paid in June/July.
Adding the interim dividend in, this would have given a total return of around £11,598 (or 16%).
So what’s been going right for Tesco as a business recently?
Strong holiday trading
Despite the challenges presented by high inflation, the company has been executing extremely well.
Notably, it has maintained its market-leading position in the face of intense competition, particularly from the German discounters. Indeed, in the four weeks to Christmas, Tesco’s market share increased 15 basis points (0.15%) to 27.9%.
In the six weeks to 6 January, like-for-like sales in its UK supermarkets rose 6.8%. Management highlighted its Finest range, which continues to perform well. Over 18m customers purchased items from this category in the festive period, representing sales growth of nearly 17%.
This strong performance enabled the company to upgrade its full-year retail adjusted operating profit guidance to £2.75bn, up from its previous range of £2.6bn to £2.7bn.
Looking ahead, one risk worth highlighting is a return of inflation, which unexpectedly rose 4% in December. There are ongoing issues in the Red Sea, with 90% of container ships bound for the Suez Canal now being rerouted, according to CNBC. This could soon add inflationary pressure.
Would I buy the stock today?
The company has been selling off its international operations and exploring a sale of Tesco Bank, its financial arm that offers savings accounts, insurance, and credit cards to more than 5m customers.
So it does seem like Tesco is retrenching and doubling down on its bread-and-butter operations (selling groceries) in its core markets (the UK and Ireland). This refocus is not a bad thing, but it does mean share price growth probably isn’t going to shoot the lights out moving forward.
That said, different shares should perform different functions in a well-diversified portfolio. As a consumer defensive stock, Tesco’s role would be to offer stability (everyone needs groceries) while pumping out those dividends year after year.
There is a 4.3% forecast dividend yield that is well-covered by anticipated earnings. While not guaranteed, I do expect the payouts to head higher in the years ahead.
As such, I’d certainly consider Tesco shares if I were building a portfolio from scratch today.
