Tesco (LSE:TSCO) shares have performed tremendously over the past five years, roughly doubling the FTSE 100‘s return. But the supermarket stock has pulled back by approximately 8% in the past month.
Does this leave Tesco attractive from a dividend and share price target perspective? Let’s take a look at the latest broker forecasts.
City’s view
The average 12-month share price target among 12 City analysts is currently 491p. That’s only around 6% higher than the present price, suggesting Tesco might be fairly valued.
Encouragingly though, the 15 brokers giving the stock a rating in the past three months have it down as a Buy. Five rate it a Hold, none a Sell.
A price-to-earnings (P/E) ratio of 20 seems a little on the high side. But looking ahead, the forward P/E multiple drops to a more reasonable 15.
This is still above rivals J Sainsbury (13.3) and Marks and Spencer (10), but Tesco’s market share is hovering close to 29%, its highest in more than a decade. So it arguably deserves a premium valuation, especially with slightly higher profit margins.
Turning to income, the forward dividend yield is 3.4%. That’s above the FTSE 100 average, but there’s not much in it. An investor putting £5,000 into the stock would be hoping to get around £170 back in dividends.
Attractive fundamentals
There’s certainly more lip-smacking yields on offer elsewhere in the FTSE 100. Yet, in my opinion, Tesco has certain qualities that still make its shares attractive.
For starters, the group’s putting up solid numbers despite intense competition. For fiscal year 25/26, which ended in February, Tesco expects adjusted operating profit to be at the upper end of the £2.9bn–£3.1bn guidance range it gave in October.
This follows a decent Christmas period, when like-for-like (LFL) sales edged up 2.4%. Online revenue grew by 11.2% in the 19 weeks to 3 January, with sales at rapid delivery service Whoosh surging 47%. Meanwhile, online LFL sales in Central Europe increased 14.3%.
Second, the company continues buying back its own shares. By next month, it will have repurchased over £4bn worth since October 2021.
As mentioned, Tesco has been consistently taking market share. This has eliminated any previous fears that tech disrupters like Ocado and HelloFresh would eat Tesco’s lunch.
In fact, the share prices of Ocado and HelloFresh are down 91% and 94% respectively over the past five years. Tesco’s is up 102% in this time. So it’s chalk and cheese, with Tesco clearly valued as the (big) cheese.
I also think the Clubcard still gives Tesco a very powerful edge. For example, I could drive 15 minutes to shop at Aldi, where I would probably get some items cheaper. But nearby on a table I have a Clubcard coupon, giving me £6 off when I next spend £40 or more in Tesco. So that’s decided then.
Is Tesco worth looking at?
The biggest risk I see is rising inflation from the Middle East conflict, which could heap more pressure on shoppers, potentially leading to smaller basket sizes. A supermarket price war breaking out is always possible in future too.
On balance though, I see Tesco stock as worth considering for an income portfolio today. But one with plenty of other dividend shares to offset risk.
