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I’ve always seen Tesco (LSE: TSCO) shares as solid but dull. And I’ve never bought them. Which just shows how wrong I can be.
I’ve been writing about Tesco for more than a decade, going back to when Philip Clarke was having a rough time in the top job. His three-year stint brought profit warnings, falling sales, the horsemeat scandal and a £250m accounting mess.
When Dave Lewis replaced him in July 2014, Tesco began its rebuild. That recovery has carried on under current boss Ken Murphy, who took over in October 2020.
FTSE 100 star
Over the last five years, the Tesco share price is up 70%. Over 12 months, it’s up 25%. That’s a strong result for a company I feared might struggle to keep up with nimbler rivals.
Despite constant pressure from Aldi and Lidl, Tesco has kept its market share at around 27%. It’s seen off Covid, survived the cost-of-living crisis, and absorbed the hit from Rachel Reeves’ first budget, which lifted employer National Insurance and pushed through a chunky rise in the minimum wage.
Tesco is the UK’s biggest private employer with around 330,000 staff, so it shoulders a big chunk of that burden. Yet it powers on.
The shares did dip in March after Asda pledged to slash prices and take a profits hit. That spooked the entire sector, but the fall didn’t last. Happily, Donald Trump’s tariffs weren’t a direct threat to Tesco’s model.
Preliminary results on 10 April showed group like-for-like sales up 3.1%, with group adjusted operating profit rising 10.9% to £3.13bn. Management flagged pressure on 2025 margins from Asda’s price war, but most investors took that in their stride.
Dividend surprise
I got a real shock today when I was scanning FTSE 100 dividend stats. I found that Tesco had delivered a 10-year compound annual dividend growth rate of 28%, the best on the entire index.
That seemed incredible. I always thought of Tesco as a steady income payer, not a standout. Today’s 3.5% yield is bang in line with the FTSE 100 average.
On closer inspection, the huge 10-year growth figure is flattered by the 2015 dividend collapse, when it paid just 1.16p per share – down 97% from the year before. It paid no dividends in 2016 and 2017, when Lewis was restructuring like mad, so that headline number starts from a low base.
More usefully, the five-year compound growth rate is 8.41%. That’s not a chart-topper, but still pretty good. So let’s use that as a representative figure.
Putting it to the test
Say an investor put £10,000 into Tesco five years ago. They’d have bought 3,472 shares at 288p. Tesco has paid out dividends totalling 63.25p a share since (I’m assuming our investor missed 2015’s interim). That’s £2,196 in income.
Their original £10k stake would now be worth £17,000, due to growth, giving a total return of about £19,200. Solid? Dull? Tesco? Get real, Mr Jones!
Tesco faces plenty of challenges. The cost-of-living squeeze isn’t over. Aldi and Lidl are still expanding. Wage and input costs are rising. A price war looms.
But at 14.2 times earnings, the shares look fairly priced rather than cheap. Yet for investors seeking a blend of long-term growth and income, I think they’re worth considering buying today.
