Tesco (LSE: TSCO) shares have fallen around 5% from their value five years ago in 2018, as you can see from this graph.
So if I’d invested £10,000 into Tesco stock five years ago, the value of my shares would have dropped to £9,500. But hold on a minute.
Here’s how much my £10,000 would be
Tesco is an income stock. The company doesn’t excel in share price growth, but rather in its dividend policy, which returns cash to shareholders. And Tesco has paid out regular and weighty dividends for each of the last five years.
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The total return, putting together share price and dividends, of a stake in Tesco in the last five years is 32.3%. So if I’d invested £10,000, the value of my shares would have risen to £13,230 in total.
Now that return sounds decent, but it might not be as good as it seems at first glance.
A lower return than average
A useful way to see how the numbers stack up is to use the compound annual growth rate or CAGR. This averages out the percentage return for each year.
That 32.3% five-year return is a 5.7% CAGR. So each year – taking it as an average – a £10,000 stake turns into £10,570.
The reason I think this is useful for Tesco is because, after years of growth, the company has settled into being an income stock. The recent sale of its Thailand and Malaysia operations shows that management seems to have pulled up the drawbridge on expansion. So the last five years might be the best indication of future returns.
How does that stack up? Well, if I was to expect a 5.7% CAGR going forward, it would be lower than the historical averages of the FTSE 100 at around 8% or the FTSE 250 at around 10%.
But in spite of this, there’s one important detail about Tesco that I believe has kept investors very interested in this stock.
The rise of budget supermarkets
Since 2017, Tesco has kept the same market share when the rest of the ‘big four’ supermarkets have lost ground to budget competitors like Aldi and Lidl. That’s a strong sign of good management that can weather the storm of cost-of-living problems and competition in the future.
| Tesco | Sainsbury’s | Asda | Morrison’s | Aldi | Lidl | |
| Market Share (Dec ‘22) | 28% | 15% | 14% | 9% | 9% | 7% |
| Market Share (Dec ‘17) | 28% | 16% | 15% | 11% | 7% | 5% |
Most of those supermarket chains are privately owned with the exception of Sainsbury’s. And if we compare the two, it’s interesting to see that the P/E ratio for Tesco (20) is nearly twice as high as that for Sainsbury’s (10). I suspect Tesco’s resilience to the threat of these budget stores plays a large part in that.
The challenge created by rising inflation presents another problem. Tesco has just announced an extension to its ‘price lock’ until Easter 2023. This measure has cut into earnings even though revenue has increased.
The decision might pay off in customer goodwill if inflation eases in the near future and could be a long-term bonus for the share price.
Taking it all into consideration, Tesco will be one to add to my watchlist if not an immediate buy.
