The Tesco (LSE: TSCO) share price is on fire. It’s defied the cost-of-living crisis to climb 30.58% over the last 12 months and a heady 70.22% over two years. I didn’t see that coming, sadly.
As a towering giant in a mature market, I thought Tesco would be more likely to crash to earth than fly to the stars. Especially with Aldi and Lidl nibbling away at its foundations.
Its share of the grocery market is now above 28% for the first time since 2015, according to Kantar. That’s comfortably ahead of the UK’s second most popular grocer Sainsbury’s at 15.2%.
Can this FTSE 100 star keep flying?
Tesco has enjoyed a magnificent turnaround since the dark days of CEO Philip Clarke. Dave Lewis put it back on course after taking over in 2014. Ken Murphy has kept up the good work since October 2020.
With inflation falling to 1.7% in September and the IMF upgrading the UK’s growth forecast from 0.7% to 1.1% for 2024, the outlook’s brighter. Goldman Sachs reckons interest rates could fall to as low as 2.75% next year, which would really give consumers a boost. Lower inflation would cut Tesco’s input costs too.
The recovery is already here, as far as Tesco is concerned, with first-half sales up 4% to £31.5bn, excluding fuel. Retail underlying operating profit jumped 10% to £1.6bn, as cost cutting and productivity improvements offset higher staff pay.
The shares have a trailing yield of 3.4%. That’s a fraction below the FTSE 100 average but Tesco remains progressive, hiking the interim dividend by 10.4%. With almost £2bn of free cash flow, the yield’s forecast to hit 3.72% in 2025 and 4.03% in 2026. Its £1bn share buyback runs until April. Let’s hope for more.
There are dividends and a share buyback too
As ever, neither growth, dividends nor buybacks are guaranteed. Aldi and Lidl are here to stay, and will feast on any weakness. Expectations are high. Inflation may prove stubborn. Any undershoot will be punished. Margins have edged up to 4.1% but, as ever, in this sector, remain wafer thin.
I have a problem when approaching a stock that’s done brilliantly well – and yes, brilliant is the word here. Am I arriving at the party too late?
Tesco’s shares trade at 15.1 times earnings, a fraction below the FTSE 100 average price-to-earnings ratio. They look even better value measured by a price-to-sales ratio of 0.4, which suggests I’d get £1 of shares for every 40p I invest.
The 12 analysts offering one-year Tesco share price forecasts give a tantalising figure of 399.3p, just below the £4 mark. That’s up more than 12% from today’s 355.3p. With a fair wind and a good old-fashioned Santa Rally, the Tesco share price really could hit £4 by Christmas or failing that, at some point in 2025.
With the longer-term view, it shares are look like an unmissable buy and I’ll grab them when I have the cash. In Tesco we trust. I just wish I’d woken up to the opportunity earlier.
This post was originally published on Motley Fool
