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Tesco (LSE: TSCO) shares haven’t exactly set the world on fire historically. But the 19.5% share price rise over the past 12 months has been very solid, especially when dividends are factored in.
It means anyone who invested £15,000 into the FTSE 100 supermarket stock one year ago would now have £17,925. A dividend payment in November would have added another couple of hundred pounds, taking the total above £18k. The next dividend is due in June.
For context, the FTSE 100 is up just 3% over the same period. So it’s been a great 12 months to own shares of the UK’s leading supermarket.
Passive income
Sticking with the £15,000 figure, were someone to invest that much in Tesco, they would bag just over 4,000 shares.
Based on the forecast dividend of 13.7p per share for this financial year, those shares would pay out approximately £550. That equates to a yield of about 3.7%, which is in line with the FTSE 100.
Next year, the supermarket is expected to increase the distribution to 15.1p per share, with the yield rising to 4.1%. If so (dividends are never certain), that would add another £615, bringing the passive income comfortably above £1,000 over the next couple of years.
Market share master
Tesco has been steadily building market share over the past few years. Indeed, it recently reached 28.3%, its highest in a decade. In the Republic of Ireland, Tesco’s market share rose to 23.9% after gains for 37 consecutive four-week periods.
Last year, group like-for-like sales rose 3.1%, while adjusted operating profit jumped 10.9% at constant rates to £3.13bn. Free cash flow of £1.75bn was towards the top end of guidance, and it continues to buy back a tonne of shares. Since October 2021, Tesco has bought back £2.8bn worth of its own shares.
Recently, the retail giant has indicated that it aims to capture 30% of the UK grocery market. With its Aldi price-matching initiative, powerful Clubcard loyalty programme, grocery delivery option, and increasingly popular Finest range, I think that’s doable.
Trolley wars
One risk investors need to be aware of here is the potential for a price war among supermarkets. This fear was sparked by rival Asda, which is intending to win back shoppers with extensive discounting campaigns.
In light of this, Tesco’s management expects adjusted operating profit of between £2.7bn and £3bn for this financial year (which started in February), down from £3.13bn.
We are committed to ensuring that customers get the best value in the market by shopping at Tesco…We are therefore providing guidance that gives us flexibility and firepower to be able to respond to current market conditions.
Tesco, April 2025
Another possible challenge is a spike in inflation. This thorny problem hasn’t gone away, and in recent weeks I’ve noticed a tick up in prices on my shops in Tesco.
Inflation-weary shoppers need a break, but Tesco has tight margins to defend. So it’s a headache the company could certainly do without.
Worth exploring
For investors building a diversified passive income portfolio, I think Tesco is worth considering. Granted, the 4%-ish yield isn’t dazzling, but the stock offers defensive qualities.
Meanwhile, there could be further share price growth in the years ahead if Tesco can indeed capture 30% UK market share.
