For the best part of a decade, Tesco (LSE:TSCO) shares went up and down but ultimately sideways. But two years ago they started rising and have hardly paused for breath since.
In this period, the Tesco share price is up 60%, and currently sits just under a 12-year high. For context, the FTSE 100 has returned about 27% in two years, before cash dividends.
It means anyone who put £5,000 into shares of Tesco in early October 2023 would now have £8,000. That’s not including dividends. Adding those in, the return rises to nearly £8,500. That’s obviously a cracking result!
Unfortunately, I don’t own Tesco shares in my portfolio. But my mate works for the company, and over the years has accumulated a decent position under one of its Save as You Earn colleague share schemes. Needless to say, he’s sitting on a very tidy profit!
Should I join him and become an investor?
Clear market leader
One of the first thing I look for in a potential investment is the company’s competitive standing. Ideally, I want to invest in industry leaders or pioneers that are on the front foot, not those struggling on the ropes.
On this front, I have no worries. In the 26 weeks to 23 August, Tesco’s UK market share increased 77 basis points year on year to 28.4% – the result of 28 consecutive four-week periods of gains. In the Republic of Ireland, its market share ticked up 11 basis points to 23.7%, consolidating three years of consistent gains.
Group sales rose 5.1% to £33.05bn, while adjusted operating profit edged up 1.5% to £1.67bn. The interim dividend was hiked almost 13% to 4.80p per share, and £891m worth of shares have been bought back since 10 April. Looking ahead to the full year, adjusted operating profit’s now expected to be £2.9bn-£3.1bn, up from the previous range of £2.7bn-£3bn. Very solid stuff.
Another thing I like about Tesco is its powerful ecosystem. There’s the well-oiled online operation, including Whoosh, its rapid delivery service. In store, there’s the Aldi Price Match scheme for price-conscious shoppers, as well as the more upmarket Finest range. All of this is underpinned by the all-conquering Clubcard.
Recently, it was reported that Amazon‘s planning to close its 19 till-free UK grocery stores. The tech giant was seen as a potential threat to Tesco a while back — not so much nowadays.
Buy Tesco shares?
My preference for investing in leaders means I often have to pay up for quality. And I would have to do that here because Tesco shares are trading at 16.2 times this year’s forecast earnings.
That’s a premium to Sainsbury’s (14.8) and Marks and Spencer (15.8). But it’s not a daft one, while there’s still a respectable 3.3% forecast yield on offer.
One worry I have though, is that Tesco’s warning that “competitive intensity remains elevated“. As we head into the festive season, a supermarket price war could kick off.
Also, there’s the uncertainty of November’s Budget. Tesco CEO Ken Murphy has said “enough is enough” on more business taxes, but they can’t be ruled out given the state of the nation’s finances.
Weighing things up, I’m going to wait till after Chancellor Rachel Reeves’ Budget and Christmas before taking another look.
