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3 reasons why I think the Tesco Share price could head higher in 2021

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Supermarkets enjoyed a strong 2020. A slick distribution and delivery set-up enabled the sector to service customers despite the lockdowns we had for much of the year. The stores were also allowed to stay open due to them selling essentials. Out of all the supermarkets, Tesco (LSE:TSCO) is the one that most impressed me. The Tesco share price hasn’t reflected this though the share price is down 23% over the past 12 months. So why do I think it could move higher this year?

A falling Tesco share price, but not what it seems

The move lower in the Tesco share price doesn’t actually tell the whole story. The shares were trading well for much of the past year, but dropped heavily in the middle of February following a special dividend payout. The payment equated to 50.93p per share, chunky considering the share price traded at that time around 280p. This payment was Tesco giving back to the shareholders some of the proceeds of divested operations abroad.

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Obviously, if the company is paying out 50.93p per share, this value is leaving the business. In a similar way to a dividend payment, the Tesco share price dropped as the adjustment to the value of the business was priced-in. Tesco consolidated its shares to limit the fall, but it still was impacted. What I’m getting at here is that the lower share price isn’t due to a struggling business.

The payment is actually one reason why I think the share price could move higher this year. It’s clear that Tesco is conscious of its shareholders’ priorities and delivering returns (either via dividends or price appreciation) to them. 

Other reasons why I’m keen

There are other reasons why I think the Tesco share price could move higher this year. The company is still finding room to grow. As of February, it grew it’s share of the market by 0.2%, reaching 27.4%. By comparison, if you add the market shares of both J Sainsbury and WM Morrison together, you still don’t get to Tesco’s chunk of the market. The size of Tesco can be taken as either a risk or a bonus depending how you look at it.

It could be seen as a risk as there’s more scope to lose business to competitors. And names like Aldi and Lidl have been chipping away at overall Big Four market share for some years.

The industry is also known for being ruthless on price, with price-matching or undercutting commonplace. This erodes margins and can dent profitability. But the firm can’t opt out of that race and this leaves the Tesco share price vulnerable.

Yet Tesco released its Q3 and Christmas trading results recently and called out “a market-leading performance”. UK Christmas period sales were up 8.4%. The results make for good reading, again making me think that performance could continue into this year with the momentum it has behind it. One risk to this point is the performance of Tesco Bank. Sales for Q3 and Christmas were down 27%. This arm could be a real drag on Tesco if the performance doesn’t improve.

Overall though, I think the Tesco share price could outperform supermarket peers as the year continues.

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jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has recommended Morrisons and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.