Here’s something I never thought I’d write about the Tesco (LSE: TSCO) share price: it’s rampant. This is a stock I once described as the ultimate FTSE 100 ‘Steady-Eddie’. Newsflash: it isn’t today.
The shares are up 30% over 12 months and 60% over two years, with dividends on top. I never expected that, and sadly, never bought Tesco shares.
Surging profits, steady hands
So what’s fuelling this change of pace? On 10 April, Tesco posted a 10.9% rise in full-year adjusted operating profit to £3.13bn, helped by strong volumes and investment in price, quality and service. Group sales (excluding VAT and fuel) rose 4% to £63.64bn.
The momentum continued into Q1. On 12 June, Tesco reported group like-for-like sales up 4.6% to £16.38bn, with UK sales up 5.1% to £12.3bn. Online was a standout, climbing 11.5% as customer satisfaction improved and capacity expanded.
Sunny spring weather helped food and clothing sales. If the sunshine holds, the trend might continue over the summer.
That said, I’m curious to see how growing demand for weight loss drugs affects supermarket habits, amid reports that snacks and treats sales are slipping across the sector. If that becomes a lasting shift, it could chip away at margins.
Competition heating up
Tesco’s share price has also benefitted from margin improvement. Adjusted operating margins edged up from 4.1% to 4.5% in the full-year numbers. That’s a key metric for supermarket investors, but it could be squeezed.
Asda’s desperate to make up lost ground, and appears willing to sacrifice margin to do it. That could pressure Tesco’s pricing power in the months ahead. Value chains Aldi and Lidl aren’t going anywhere. Although Tesco’s premium and own-label ranges are both performing, shoppers could drift further downmarket if the cost-of-living squeeze drags on.
The dividend story’s solid. The board froze the payout at 10.9p per share in 2023, but lifted it 11% to 12.1p in 2024 and by more than 13% to 13.7p this year.
However, forecasts suggest a tiny 1.5% rise to 13.9p this time round. That would push the forward yield to just under 3.5% based on today’s price of 400p. That’s roughly the FTSE 100 average.
Slow and steady returns
Twelve analysts covering the stock have set a median 12-month target of just under 415p. That’s a rise of around 3.75% from today. Add the forecast dividend and total returns could hit 7.25% over the next year.
So a £10,000 investment might grow to around £10,725. Solid, yes — but not exactly rampant. These are forecasts, of course, and can quickly go out of date.
I’m not expecting more near-term fireworks. As ever, the real value will come from compounding over five, 10 or 20 years.
With a price-to-earnings ratio of just over 14, Tesco doesn’t look overly expensive. I think investors might consider buying today, despite the challenging market.
But for all the excitement around its recent run, this remains a buy-and-hold building block. I don’t expect to be using the word rampant for a while. More like Steady-Eddie, but who knows? I could be wrong again.
