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

Jonathan Smith explains the recent fall in the Tesco share price and how he sees good value in the company due to recent growth.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

A mother and daughter collecting their home grocery delivery.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

10% dividend growth! 2 FTSE 100 stocks tipped to supercharge cash payouts

These FTSE 100 stocks have strong records of dividend growth. And they're expected to keep on delivering, as Royston Wild…

Read more »

Investing Articles

Down 17% in a month and yielding 7.39%! Is this FTSE 100 share a screaming buy for me?

When Harvey Jones bought Taylor Wimpey last year he thought this FTSE 100 share was a brilliant long-term buy-and-hold. Has…

Read more »

Investing Articles

Here’s how I’m using a £20k ISA to target £11k+ in income 30 years from now

Is it realistic to put £20k in an ISA now and earn over half that amount every year in passive…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

If I could only keep 5 UK stocks from my portfolio I’d save these

Harvey Jones is running through his portfolio of top UK stocks to see which ones he couldn't bear to do…

Read more »

Midnight is celebrated along the River Thames in London with a spectacular and colourful firework display.
Investing Articles

I’m aiming for a million buying unexciting shares!

By investing regularly in long-established, proven and even rather dull businesses, this writer plans to aim for a million. Here's…

Read more »

Investing Articles

3 things to consider before you start investing

Our writer draws on his stock market experience to consider a few vital lessons he would use to start investing…

Read more »

Investing Articles

Will this lesser-known £28bn growth stock be joining the FTSE 100 soon?

As the powers that be plan a reorganisation of Footsie listing rules, this massive under-the-radar growth stock could find its…

Read more »

Investing Articles

Fools wouldn’t touch these 5 FTSE 350 flops with a bargepole – how come I own 3 of them?

Harvey Jones took a chance on three struggling FTSE 350 stocks in the hope that they'd stage a dramatic recovery.…

Read more »