Tesco (LSE:TSCO) shares have had a fantastic run over the past three years. In this time, they’re up 87%, excluding dividends.
For context, the FTSE 100 has risen around 28%. So Tesco has been outperforming the market by a wide margin.
Zooming further out, the share price is above where it was in 2014, when the notorious accounting scandal blew up. That involved Tesco scrapping its dividend, proving that even blue-chip income can quickly evaporate.
Still the dominant force
A big part of Tesco’s revival has been due to it winning market share from rivals. In June, the supermarket commanded a 28% share of the UK’s grocery market, the highest that number has been in nearly a decade.
So, while the German discounters continue to grow their own share on these shores, it’s not at Tesco’s expense. And the Clubcard is surely an important factor, with more than 23m UK households now holding one.
In the 13 weeks to 24 May, like-for-like sales rose 5.1% in the UK and 5.5% in Ireland. Group sales ticked up 4.6% on a like-for-like basis to £16.4bn.
Despite fierce competition and ongoing challenges from the cost-of-living crisis, the firm expects to hit its previously announced full-year targets. That’s for adjusted operating profit of £2.7bn-£3.0bn, and free cash flow within its medium-term guidance range of £1.4bn-£1.8bn.
Another positive for Tesco has been share buybacks. In April, the supermarket giant committed to buying an additional £1.45bn worth of its own shares by April 2026. By then, it will have bought back a whopping £4.25bn worth since October 2021.
Over time, buybacks can make the company more profitable on a per-share basis.
Finally, Tesco continues to benefit from cash-strapped customers not going out. They’re treating themselves to a Tesco Finest night in, rather than a meal out. In Q1, sales for its Finest range were up 18% year on year.
Daft prices
Despite falling inflation, our customers have continued to feel the pressure of the cost of living this year and value has been extremely important to them.
Tesco
What could derail Tesco’s progress? I would say it’s inflation, which has been creeping back up in recent weeks.
On my weekly shop in Tesco, I’m noticing this. Things like olive oil, coffee, and meat are just ridiculously expensive, as are many branded food items. For example, a bottle of Heinz Tomato Ketchup doesn’t appear good value these days (luckily for me, Tesco’s own red sauce is far cheaper).
If shoppers start feeling the pinch again, basket sizes could start shrinking. And that would knock like-for-like sales.
Passive income
City analysts aren’t forecasting much dividend growth this year. And as things stand, the forecast yield is 3.36%, which is in line with the index average.
It means someone would have to buy around 3,500 shares to aim for £500 in annual dividends. These would cost just over £15,000 today — hardly chump change!
Pricey stock
After rising almost 30% in the past six months, the stock looks a bit pricey to me. It’s trading at more than 16 times this year’s forecast earnings. That’s higher than both J Sainsbury (13.8) and Marks and Spencer (14).
While Tesco is a high-quality dividend stock, I personally will wait for a share price pullback before considering it.
