I can’t believe the Tesco (LSE: TSCO) share price. It’s an absolute monster. It’s up 37% in the last year, and 110% over five. Dividends are on top, turbo-charging the total return. How does Britain’s biggest grocer keep delivering?
It wasn’t always like this. In 2014, Tesco was a basket case. Market share, sales, profits, staff morale and customer attitudes were falling as one. Plans for global domination had flopped, with Tesco losing £1.7bn on its ill-fated Fresh and Easy US business. Throw in a £326m accounting shock and a horse meat scandal, and that stands as Tesco’s darkest hour. Then came the dawn.
‘Drastic’ Dave Lewis (now at Diageo) began the turnaround, and from 2020 CEO Ken Murphy has continued the good work. We’ve seen that again this morning (16 April) with yet another set of well-received results.
Top FTSE 100 growth stock
Tesco shares are up around 2.5% this morning after it reported growth across all divisions in the year to 28 February. Initiatives such as its Everyday Low Prices and its Aldi Price Match continue to pull in the punters, while its Clubcard conquers all. Tesco Finest is thriving too.
Group like-for-like sales rose 3.5%, hitting 4.2% in the UK, but wholesale distributor Booker remains sluggish at 0.2%. Group adjusted operating profit climbed 0.6% at constant exchange rates to £3.15bn, beating guidance. Free cash flow rose 11.8% to £1.96bn, boosted by rising sales and disciplined working capital management.
However, the board was cautious about the year ahead, warning of the impact of the conflict with Iran. Guidance suggests underlying operating profits of between £3bn and £3.3bn. Much depends on how long the war lasts and the impact on oil prices, supply chains, inflation, unemployment and the like.
While that’s completely out of the grocery giant’s hands, Tesco is better placed to withstand the downturn, because of its market strength, strong supplier relationships and pricing power. The board has also worked hard to cut costs, helping to offset the impact of higher employer’s National Insurance and two big minimum wage increases.
And there’s income too
As well as growth, Tesco has delivered dividends. The trailing yield has slid to just 2.87%, as a direct consequence of that share price surge. Recent policy has been progressive, with the board hiking shareholder payouts by 11% in 2024, 13.2% in 2025 and 5.84% in 2026. The yield is forecast to hit 3.06% in 2026, then climb again to 3.36% in 2027.
Tesco shares are getting a little expensive, with the price-to-earnings ratio climbing to just over 17. That’s higher than rival Sainsbury’s, which has a P/E of just over 15. Tesco has been the better buy, but there’s a fair chance its shares will slow from here.
So is that share price too good to be true? No, it reflects a really strong and well-run underlying business, one that’s well worth considering. However, today’s toppy P/E makes me think the shares will struggle to maintain their recent velocity. Mind you, I suspect I said that a couple of years ago, and look how well they’ve done since.
