Investors often think that in order to generate big returns from the stock market, they need to invest in exciting growth stocks such as Nvidia and Amazon. This couldn’t be further from the truth. Just look at Tesco (LSE: TSCO) shares. Over the last two years, they’ve generated phenomenal returns for investors.
A jump in the share price
Two years ago, Tesco shares closed the day at 251p. Let’s say that an investor snapped up £5k worth of stock at that price.
Today, the share price is 397p. So, the investor’s £5k investment would have grown to about £7,910 (I’m ignoring trading and platform fees here).
That’s a brilliant return in two years. It works out at about 26% per year.
Dividend income too
It gets better though, because Tesco has also paid dividends to its shareholders.
I calculate that had an investor bought some shares two years ago, they would have been entitled to 23.4p per share in dividends. This would have meant another £466 or so for the investor above who bought £5k worth of stock (assuming the dividends weren’t reinvested).
So overall, the investor would now have about £8,376. In other words, they would have made a profit of £3,376 from their initial £5k investment.
Not bad from a sleepy stock like Tesco!
I was bullish
Now, Tesco shares haven’t always delivered strong returns like this of course. In fact, there have been times when the shares have tanked and investors have experienced big losses.
However, I’ve been relatively bullish on the shares for most of the last two years. And I’ve highlighted the stock as one to consider buying numerous times here at The Motley Fool.
I’ve been encouraged by the company’s rising level of profitability. Over the last two years, the company has raised its profit guidance on several occasions.
I’ve also liked the rising dividend payments and reasonable valuation. Since early 2023, the price-to-earnings (P/E) ratio has often been relatively low at around 10 to 12.
Worth a look today?
Looking ahead, I think the shares could have further to run. For the financial year ending 28 February 2026 (next financial year), City analysts expect earnings growth of nearly 10%, which is decent.
As for the valuation, the forward-looking P/E ratio using next year’s earnings forecast is 13.6. That seems quite reasonable to me.
One factor that could potentially help the shares is the 3.7% dividend yield. If UK interest rates continue to fall, and the rates offered on savings accounts decline, this yield could come into focus.
However, there are also factors that could potentially hurt the shares. One is the UK government’s new National Insurance (NI) rules – these are likely to hit Tesco’s profits.
Overall though, I’m cautiously optimistic about Tesco shares. I believe they’re still worth considering for a portfolio today.
