If I invest £1,000 in Tesco shares today, how much could I have in 5 years?

Will Tesco shares deliver attractive returns over the next few years? Roland Head crunches the numbers and gives his verdict.

| 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.

Girl buying groceries in the supermarket with her father.

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.

Tesco (LSE: TSCO) shares have suffered in this year’s market sell off.

The UK’s largest supermarket now offers a 5% dividend yield and trades on a modest 10 times earnings. I think we could see the shares bounce back at some point, perhaps when inflation starts to ease.

Created with Highcharts 11.4.3Tesco Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

If I bought Tesco stock today, how much could I realistically expect to earn over the next five years? I’ve been crunching the numbers to find out. Here’s what I think.

Should you invest £1,000 in Apple right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Apple made the list?

See the 6 stocks

Growth potential?

Tesco currently has a 27% share of the UK grocery market. That means it collects £1 out of every £4 spent on groceries in the UK. Second-place Sainsbury’s is a long way behind, with a market share of 14.7%.

I expect Tesco to remain the UK’s largest supermarket. But I don’t think it will be able to gain much more market share. Despite this, I do expect Tesco to be able to increase its profits over time.

Profit growth could come from some of the group’s other businesses, such as wholesale, mobile, and banking. Profit margins on groceries could also rise if the economic outlook improves and shoppers switch back from cheaper own brands to premium products.

A buying opportunity?

The total investment return from a dividend stock has two elements — dividend income and share price gains (or losses).

Tesco’s dividend last year was 10.9p. I suspect growth will be limited over the next few years as the company tries to maintain dividend growth without paying out more than it can afford.

I’ve assumed average dividend growth of 2.5% each year for the next five years. That would mean I’d receive dividends totalling 57.8p per share over this period. That’s equivalent to a 27% return on today’s share price of 214p.

Of course, I’d also hope to see some share price gains over this period too. One common technique used by analysts to forecast share price growth is to assume that the dividend will increase by the same percentage as the dividend each year.

In my model, this would see Tesco’s share price rising by an average of 2.5% per year — an increase of 13% over five years.

Adding my dividend and share price estimates together gives me a forecast total return of 40% over five years. That’s equivalent to a 7% annualised total return, broadly in line with the long-term average from the UK market.

Tesco shares: a buy today?

Of course, all the numbers I’ve discussed above are only a guess. It’s impossible to predict share price movements and I can’t be sure how Tesco’s dividend will change. Even so, I find this kind of model useful when I’m looking for undervalued shares.

In this case, my feeling is that Tesco looks reasonably valued. In my view, the stock might be slightly cheap, but certainly isn’t a screaming bargain.

I think Tesco’s 5% dividend yield should be pretty reliable over the next few years. But I suspect growth will be limited. For a mix of income and growth, I think there are probably better choices elsewhere.

Should you buy Apple now?

Don’t make any big decisions yet.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — has revealed 5 Shares for the Future of Energy.

And he believes they could bring spectacular returns over the next decade.

Since the war in Ukraine, nations everywhere are scrambling for energy independence, he says. Meanwhile, they’re hellbent on achieving net zero emissions. No guarantees, but history shows...

When such enormous changes hit a big industry, informed investors can potentially get rich.

So, with his new report, Mark’s aiming to put more investors in this enviable position.

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

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.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Sainsbury (J) 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

Growth Shares

2 crackerjack growth shares to consider buying as the dust settles

Jon Smith talks through a couple of growth shares that he feels represent good value for investors right now as…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Investing Articles

I’ve been investing in the stock market for 25 years. Here are 4 tips to navigate the current volatility

Investing during periods of extreme stock market volatility isn’t easy. Here, Edward Sheldon provides his top tips to get through…

Read more »

Investing Articles

£10,000 invested in Tesla shares a fortnight ago is now worth…

Despite extreme volatility, the value of a £10,000 investment in Tesla shares from a fortnight ago hasn’t changed much. That’s…

Read more »

Investing Articles

3 FTSE 250 shares to consider for a well-diversified portfolio!

Looking for ways to create a well diversified portfolio? Here are three FTSE 250 shares to think about for growth,…

Read more »

Investing Articles

Down 38% over 12 months, is the BP share price the bargain of 2025?

BP’s share price has experienced a massive decline over the last year. Could there be a major opportunity here for…

Read more »

Investing Articles

2 FTSE 100 dividend shares to consider as global recession looms!

FTSE 100 investors need to tread carefully if they're to avoid dividend disappointment in 2025. Here are two top shares…

Read more »

Investing Articles

This FTSE 100 hidden gem now yields a stunning 9.9% a year, so should I buy more?

This relatively obscure FTSE 100 savings and investment giant now has a super-high yield, and its share price also looks…

Read more »

Chalkboard representation of risk versus reward on a pair of scales
Investing Articles

Near a 1-year low around 66p, is Vodafone’s share price too cheap for me to ignore?

Vodafone’s share price is near its 12-month traded low, which means an opportunity to buy the stock on the cheap.…

Read more »