From the start of 2025, Tesco (LSE:TSCO) shares have returned 17.1% to investors. Therefore, £5,000 invested would have turned into £5,852.50.
Doing a quick Google search, the average cost of Christmas for a UK family is around £600-£700. For higher earners, this can be over £1,000. Either way, the £852.50 gain would have made a significant contribution.
But if investors put £5,000 in Tesco’s shares today, will it help to cover the cost of Christmas by next year?
Valuation and dividends
Right now, Tesco has a forward price-to-earnings (P/E) ratio of 15.2. While this isn’t necessarily expensive, it’s not ridiculously cheap either.
However, when compared to fellow Footsie constituent Sainsbury’s, it looks like it’s on the cheaper side. With a P/E of 21.5, Sainsbury’s shares suggest some undervaluation of Tesco’s shares.
Furthermore, after a 12.9% increase in its interim dividend, the company’s shares now boast a dividend yield of 3.5%. If we combine last year’s final dividend of 9.45p with this year’s interim dividend of 4.8p, we obtain a total annual dividend of 14.25p per share.
Now, with its current share price of 436.24p, investors can buy 1,146 of its shares with £5,000. That means, they can obtain £163.31 just from the supermarket’s dividends. Therefore, they can rely less on the share price to help pay for next year’s Christmas shopping!
It’s important to remember that dividends aren’t guaranteed. Though, the company does have an impressive track record of raising its annual dividend since 2017. So, it’s possible that investors could make even more passive income.
Risks
There was plenty to like in Tesco’s recent half-year results. Notably, group sales increased by 5.1% to £33.1bn. Free cash flow also increased 2.9% to £1.3bn.
However, I also see some concerns arising from its results. Group operating profit only increased by 1.5%, less than sales. This suggests margins are being squeezed by a combination of higher inflation and cost-of-living pressures.
If these issues persist, I think the UK’s largest supermarket could face even more problems with its margins. In this scenario, it might be forced to raise its prices. Consumers could turn to cheaper alternatives like Aldi and Lidl as a result, which could reduce Tesco’s market share.
Moreover, net debt has climbed by 3.8% to £9.9bn, which I believe investors should be cautious of.
Prediction
As free cash flow is growing, I believe that Tesco is in a decent position to continue raising its dividend.
Furthermore, there may be some scope for a share price increase as its P/E isn’t that high.
However, investors must remember that the company’s shares have had three strong years. They have grown 17.1% so far this year, 50.1% since the start of 2024, and 94.5% since the start of 2023.
While this can be justified with its earnings growing from £737m in FY23 to £1.6bn in FY25, I think cost-of-living pressures and inflation will persist until next Christmas at least. This could create issues for its margins and earnings growth.
Ultimately, I think its shares will remain near their current position and may see a modest share price increase of about 5% in an optimistic scenario.
Therefore, a £5,000 investment could turn into £5,250 by next Christmas (plus the dividends). That’s why I think investors should consider potentially looking elsewhere to fund next year’s Christmas.
