Tesco (LSE: TSCO) shares are the ones that got away. I was tempted to buy the FTSE 100 supermarket for years but didn’t, thinking it lacked growth potential.
The grocery sector is such a competitive one. Aldi and Lidl continue to grow at speed, and household budgets remain under pressure as the cost-of-living crisis drags on. Despite all that, the Tesco share price is up 21% in the last year and 81% over five years, with dividends on top.
Aviva (LSE: AV.) is another stock I let slip through my fingers. For years the FTSE 100 insurer drifted along, weighed down by a sprawling business model with little focus. Not now. The shares are up 33% in a year and 143% across five, and investors have received a pile of dividends.
FTSE 100 turnaround stocks
Tesco has rebuilt itself under chief executive Ken Murphy by sharpening its focus on value and service. The group has been consistently gaining market share and showing resilience in a tough retail climate.
Aviva has been transformed under Amanda Blanc, who became CEO in 2020. She sold off non-core businesses, streamlined the group and concentrated on its core markets. That strategy has paid off handsomely.
Tesco’s latest trading update on 12 June underlined the progress. Group like-for-like sales rose 4.6% to £16.4bn, while UK market share climbed 44 basis points to 28%. Online sales are climbing too.
Aviva’s half-year results on 14 August were equally strong. Operating profit rose 22% to £1.07bn thanks to price hikes and rising premiums, while net wealth inflows increased 16% to £5.8bn.
Past performance can mislead
Tesco now trades on a price-to-earnings ratio of 14.94, almost identical to the long-term FTSE 100 average. I expected it to be pricier after such a strong run. The trailing dividend yield is a modest 3.32%. Aviva has a heftier P/E of 28.6, although its trailing yield is a chunky 5.33%.
Both face challenges keeping up the pace. Tesco is the UK’s biggest employer, and has to pay higher employer’s national insurance, and fund a big increase in the minimum wage. A grocery sector price war will squeeze margins.
Stock markets have had a strong run but Aviva could struggle if we see a correction, which would hit inflows the value of assets under management. Today’s high expectations could prove a burden if it cannot keep up the growth
So what do the experts reckon?
Forecasts for the year ahead
Like me, they’re cautious. Consensus forecasts suggest Tesco could climb to 425.1p over the next year, a rise of 2.87%. Add a forecast dividend yield of 3.37% and the total return would be 6.24%. That would turn £10,000 into £10,624.
Aviva is tipped to slip 2.3% to 653.8p. Yet with a forecast yield of 5.72%, the total return should turn positive at 3.42%. That would turn £10,000 into £10,342.
After recent heady returns, those numbers look like small beer. Investors can hardly complain given the fun they’ve had in recent years. The excitement seems likely to calm from here but I think they’re worth considering as solid income growth plays for investors who take the long-term approach.
