I don’t own Tesco (LSE: TSCO) shares. I never have. They’ve been on my watchlist for years, yet I’ve never been tempted to take the plunge and buy them.
There’s nothing wrong with the stock. It’s one of the most popular on the FTSE 100, and rightly so. It offers decent dividends and solid growth prospects as well.
Tesco is also a strong business. While it lost its way under Philip Clarke, it has battled back impressively since he was ousted in 2014. Successor Dave Lewis got a grip. He put a stop to all the profit warnings. There have been no more accounting scandals.
This is a solid stock
Tesco has survived the challenge from German budget chains Aldi and Lidl. Its market share has been hovering around the 27% mark for years. It’s still the UK’s biggest grocer, the one to beat. The second biggest, Sainsbury’s, has a market share of just 15.3%.
It also held its own during the pandemic and cost-of-living crisis. The shares look reasonable value, with a trailing price-to-earnings ratio of 12.24 times earnings. That’s roughly in line with the FTSE 100 as a whole, which has a P-E of 12.4 times.
Its trailing yield is 4.19%. That’s above the FTSE 100 average of 3.8%. Which looks like another good reason to buy it.
Let’s say I invested my full £20,000 Stocks and Shares ISA limit in Tesco shares today. Given the current yield, that would give me a second income stream of £838 a year. There are bigger yields on the FTSE 100. I know, because I’ve been chasing them.
However, Tesco’s recent dividend history is pretty decent. It paid 9.15p per share in 2021 and 2021 (a period that straddled the pandemic). The board increased that to 10.9p per share in 2022 and 2023. In 2024, the dividend increased by 11% to 12.1p per share.
Shareholder payouts are covered twice by earnings, which is exactly the number investors like to see. So there are strong reasons to add Britain’s biggest grocer to my ISA portfolio.
Yet the share price hasn’t exactly been shooting the lights out. It’s up a modest 3.33% over the last year. That’s almost exactly the same as the return on the FTSE 100 as a whole, which climbed 3.42%.
The FTSE 100 has more to offer
The Tesco share price has done better over five years, rising 15.56% against 10.29% for the index. If I’d bought Tesco five years ago, I’d have a total return of almost 40% over that time, according to my crude maths.
Tesco is an expensive business to run. It has a hugest estate of stores, and an army of staff. Margins are thin at 4.1%, although they have widened slightly.
Hopes of turning it into a global grocer died years ago. The business can only grow so far, given the UK’s competitive market. Any slip-ups will be punished by rivals. Although it may benefit when the cost-of-living crisis eases.
Given these concerns, I wouldn’t invest my full £20,000 ISA in Tesco shares. At most, £5,000. Yet I’m not sure I will. I reckon I can find better growth prospects elsewhere on the FTSE 100. And I know I can get higher dividend income. Tesco just doesn’t do it for me.
