At the start of this month, I rashly declared that Tesco (LSE: TSCO) shares were boring. They’ve since jumped an impressive 16%, from 425p to 493p. That would have turned £10k into £11,600 in less than three weeks, and there’s nothing dull about that. So what’s going on?
First, apologies to Tesco for slighting its stock. In my defence, I did say that long-term investors had seen plenty of excitement, with the shares almost doubling in just three years and up 30% over 12 months. I just thought it couldn’t go on.
FTSE 100 thriller
I was concerned that the price-to-earnings (P/E) ratio was looking a touch rich at above 15, while all that share price growth had trimmed the trailing yield to 3.1%. I suspected short-term investors might now seek their kicks elsewhere.
Not a bit of it. Tesco got a lift on 3 February when the latest Worldpanel data showed annual grocery price inflation falling to 4%, the lowest level since last April. That should ease pressure on shoppers and support margins too.
Sales climbed 4.4% over the four-week period, outstripping the market average of 3.8%. That was especially encouraging after a relatively muted Christmas, with sales up just 3.2%. Tesco’s market share hit 28.7%, comfortably ahead of closest rival Sainsbury’s on 16.2%.
We had more positive news on Wednesday (18 February), with consumer price inflation falling to 3% in January. That should further ease the cost of living squeeze and give the Bank of England room to cut interest rates further. Welcome news for consumers and businesses alike. Tesco isn’t the only winner. Sainsbury’s shares have jumped 12% over the last month.
The stock looks pricier today
There’s a snag. Tesco’s P/E has now climbed to 17.8. The trailing yield has slipped to a humdrum 2.78%. That should rise over time, but slowly.
In 2025, Tesco paid a full-year dividend of 13.7p per share. That’s forecast to hit 14.2p in 2026, a modest increase of 3.6%. In 2027, the forward yield is pencilled in at 15.7p, a stronger increase of 10.5%. That produces a forward yield of about 3.2% for 2027, based on today’s share price. That’s steady progress, but from a low base.
I’ve been poring over broker forecasts and found the 12 analysts setting one-year targets produce a median share price price of 478p. Disappointingly, that 3% below today’s 493p. Many of these estimates may pre-date the latest share price surge, but they reinforce my sense that the excitement has already played out.
Tesco still depends heavily on the wider economy, and the backdrop remains mixed. The group must absorb higher National Living Wage costs, increased employer National Insurance contributions and business rates. Margins in food retail are thin at the best of times.
I still think Britain’s biggest grocer is worth considering for the long haul. In the short term, the ride could turn bumpier. I think there’s better value on the FTSE 100 today, and I’m going looking for it. But I’ve learned my lesson. I’ll never call Tesco boring again.
