Tesco (LSE:TSCO) shares have surged since I last covered the stock in May.
I had been fairly upbeat on the stock. With inflation falling and the cost-of-living crisis coming to an end, it was clear that Tesco had emerged as one of the biggest winners from a rather turbulent period for grocers.
Perhaps by virtue of its economies of scale, Tesco was one of the few legacy British supermarkets not to lose market share to low-cost German peers, Aldi and Lidl.
However, this resurgent share price — taking it to levels not seen for a decade — also means the dividend yield has fallen.
Investing today, the dividend yield based on payments for the past 12 months is 3.3%. But it’s always important to look at where the dividend yield might go. Here’s what analysts are saying.
Dividend forecast
The below table shows the expected rise in dividend payments through to 2027. As we can see, dividends are expected to increase at a fairly solid pace, almost keeping up with the growth in expected earnings.
| 2025 | 2026 | 2027 | |
| Dividend per share | 12.98p | 14.14p | 15.31 |
| Earnings per share | 25.3p | 27.2p | 29p |
| Dividend yield | 3.55% | 3.87% | 4.19% |
The current forward dividend for 2025 is actually the same as the FTSE 100 average. I’d suggest that the increases in dividend payments will mean that Tesco becomes an above-average dividend payer in the medium term.
Overtaking the price target
Interestingly, Tesco stock recently overtook the consensus price target. The consensus price target is the average estimation of fair value from all the analysts — in this case, 14 — covering the stock.
UK-listed stocks tend to trade at a significant discount to the average share price target. That’s simply a sentiment thing as investors haven’t been wildly keen on the UK economy or British stocks for some time.
Currently, there are six ‘buy’ ratings, five ‘outperform’ ratings, two ‘hold’ ratings, and just one ‘underperform’ rating.
So, there’s a mixed picture. Analysts have indicated they’re positive on the stock, but the recent rapid share price growth has meant that many of the share price targets have been passed.
A premium on size
Tesco broadly trades in line with its peers, potentially with a modest premium. The stock is currently trading at 14.4 times forward earnings for 2025, 13.4 times for 2026, and 12.6 times for 2027. Incidentally, this is also very much in line with the index average.
While this data doesn’t suggest that Tesco is a slam dunk buy, it’s definitely worth recognising that investors are often happy to pay a premium for a company with a dominant market share.
It’s also possible to hypothesise that as inflation cools and spending habits normalise, Tesco could benefit further as shoppers ditch Aldi and Lidl for a more premium shopping experience.
Of course, there are always risks which investors need to remain on top of. The Labour government is determined to do more for workers rights and Tesco recently lost a legal case against shop workers’ union Usdaw over its ‘fire-and-rehire’ strategy.
