Supermarket chains are known for being defensive businesses with steady cash flows. So, how would a £1,000 investment in Tesco (LSE: TSCO) shares have fared over the past five years?
The period has been a turbulent one. But, in theory, difficult economic and geopolitical times are when investors would most likely be glad of being in defensive stocks.
However, Tesco’s revenue, earnings, cash flow and dividends have all waivered over the period. But in the firm’s defence, it did keep up dividend payments right through the pandemic.
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Share price and dividend gains
The share price has cycled up and down as well. But it never dropped much lower than around 209p, the level it was five years ago. And as of yesterday, it stood at 249p. So that’s a gain in the price of 40p for the period in question.
But that’s not the only return investors will have enjoyed. The company paid dividends twice a year without fail. And I make the total dividend take over the past five years to be 40.82p per share.
Therefore, the total return for investors has been the gain in the share price plus the dividends. And that works out at 80.82p per share.
And looking at that gain as a percentage of the starting share price, it comes out at 38.67%. So, £1,000 investment would be worth somewhere in the region of £1,386 now. But I’d realise a little less because of trading costs.
Nevertheless, the return is positive. But it’s not spectacular. So, I’d say Tesco has done for investors what most would expect and delivered stability to their share portfolios.
What Tesco lacks, for me
Indeed, I like to base my own dividend-led investments on businesses operating in defensive sectors. But Tesco wouldn’t make the cut for me. And that’s because of the volatility present in the five-year financial and dividend record.
I like my defensive investments to have earnings, cash flow and dividends that tend to rise a little each year. And I’m also wary of all the competition faced by Tesco and the commoditised nature of its business. It doesn’t have powerful brands, for example, in the way that companies like Diageo and Unilever do.
Nevertheless, as part of a diversified portfolio of defensive stocks, Tesco will have delivered a satisfactory return for investors. But, looking ahead, City analysts are predicting modest declines for earnings and the dividend ahead.
However, on the positive side, the forward-looking dividend yield is running just above 4% for the trading year to February 2024. Some may find that level attractive. But I’ve always wanted the yield to be above 5% before entertaining the idea of holding the shares. And that’s to provide a decent amount of compensation for taking on the risk of holding the shares.
So, on that basis, Tesco is not on my watch list at the moment and I’m avoiding the shares for the time being.
