4.24% yield and a P/E of just 12.1! Tesco shares look like a no-brainer buy for me

Harvey Jones thinks Tesco shares look good value after today’s solid first-quarter results. He’s now saving up to buy the FTSE 100 grocer.

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Tesco (LSE: TSCO) shares are never going to shoot the lights out. As the UK’s biggest grocery chain, it’s not exactly an unknown quantity. Yet it’s now one of the most impressive performers on the entire FTSE 100.

Tesco has fought back strongly from the from former boss Philip Clarke’s disastrous tenure, when instead of conquering the world the chain found itself fighting a losing battle on home turf against foreign budget chains Aldi and Lidl.

Today’s (14 June) first-quarter statement shows it isn’t just holding its ground, but winning back lost territory. Q1 sales jumped 4.6% to £11.3bn in the 13 weeks to 25 May. Market share jumped 52 basis points to 27.6%, growing at a two-year high.

FTSE 100 comeback kid

Total group sales rose 3.4% to £15.3bn, with stores in the Republic of Ireland and central Europe performing well, as easing inflation boosted volumes.

The board also confirmed guidance for retail operating profits to hit £2.8bn this year, up from the £2.76bn it reported in 2023/24. That’s only a modest 1.45% increase, but at least it’s pointing the right way.

Tesco is still making money despite being, in the words of chief executive Ken Murphy, “the cheapest full-line grocer”.

The days when customers raged against poor service and scruffy stores are almost forgotten, with Tesco reporting “better brand perception and customer satisfaction”. All that hard work is paying off. 

With a summer of sport ahead, sales should enjoy a further lift, especially if England and Scotland make progress in the Euros. Although the rainy summer can’t be helping barbecue sales.

The sector should get a boost when the Bank of England finally cuts interest rates, putting more money into shoppers’ pockets. The downside is that slowing food price growth could squeeze revenues and margins, which are already wafer thin.

So is Tesco a no-brainer buy? Its shares are up a solid 15.33% in the past 12 months, more than double the FTSE 100 increase of 7.32%. Yet with Tesco stock trading at 12.1 times forecast 2025 earnings, it’s not exactly expensive.

Investors can look forward to a yield of 4.24% in 2025, again, rising to 4.57% in 2026. I can find far higher yields on the FTSE 100, but not all of them offer the same share price growth prospects.

Tesco continues to operate in a highly competitive market, where rivals will go all out to claw back recent lost share. The long-term outlook for the UK economy looks pretty tough, with taxes expected to rise too, so it’s unlikely customers will suddenly feel flush. Tesco will have to battle for every sale.

Yet given its huge customer base and improving reputation, Tesco is now back on my ‘buy’ list. As soon as I have the cash, I’ll fill my basket.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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