The Tesco (LSE: TSCO) share price has been performing well recently, rising 8% in the last month, and nearly 20% over the last six months. For a defensive supermarket stock, a stock type usually viewed as being fairly stable, this is a very strong rise. It’s partly due to its recent excellent results, as well as the bullish sentiment around the supermarket sector right now. This follows the private equity buyout of Morrisons. So, with this in mind, what’s next for this supermarket stock?
Recent results
The Tesco share price soared last week, thanks to an excellent set of half-year results. Here, the supermarket reported a revenue increase of 5.9% to £30.4bn. Yet it was the increase in profits that grabbed my attention. In fact, operating profits were nearly 30% higher at £1.3bn. This demonstrates that many Covid-related costs have now ended, and the outlook for Tesco is strong.
Thanks to these results, shareholders have also been rewarded with a £500m share buyback programme. This accompanies the dividend per share of 3.2p, unchanged from last year. As such, the full-year dividend equates to a yield of 3.2%. After the company returned 50.93p per share as a special dividend last year (on the sale of its Malaysian and Thai assets), it’s clear that shareholder returns aren’t too shabby. It has also pledged to increase its dividend each year, with the aim of paying out around 50% of earnings.
The sale of its Malaysian and Thai assets has also allowed Tesco to improve its financial position. Indeed, since February, net debt has been reduced by £1.7bn to a much healthier £10.2bn. The company also states that one of its aims is to “maintain a solid investment grade balance sheet”. I’m particularly keen on this aim as it helps to reduce the risk of investing in the company.
Are there any risks?
Despite the defensive nature of supermarkets, there are many factors that could drive the Tesco share price down. In particular, I’m slightly worried about inflation. Indeed, current inflationary pressures mean that Tesco may be forced to put its prices up, otherwise it may suffer damaged profits. Nonetheless, this could potentially contradict its current Aldi price match strategy, which has been expanded to around 650 products. This is therefore a dilemma for the supermarket, and something that could strain the Tesco share price over the next year.
The current HGV driver shortage is also a worry for the firm, to the extent that Tesco was offering drivers £1,000 bonuses. This could also dent profits.
Can the Tesco share price rise further?
But with a price-to-earnings ratio of around 13.5, I believe that the Tesco share price has got slightly more room to rise. This is especially true after the buyout of Morrisons, something which could (although it’s unlikely) happen to Tesco. But I’m still not rushing to buy. This is because I feel that there are better options in the FTSE 100 that offer more upside potential. As a dividend stock, the 3.2% yield is also just not tempting enough.
