Tesco shares are up 16%: is now the time to buy?

Tesco shares have performed well so far in 2023. Dylan Hood takes a look at whether now is the time to add this UK grocery retailer to his portfolio.

| 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.

Young happy white woman loading groceries into the back of her car

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 had a great run so far in 2023. Since the start of the year, the stock is up 16%, compared to the FTSE 100, which has risen by just 0.6% over the same period. Extending this timeframe to 12 months, the shares have returned a healthy 32%, outperforming the Footsie by almost 21%. At today’s price of 265p, should I be looking to add this stock to my portfolio? Let’s investigate.

Historic returns

Although the stock has performed well in 2023, over a five-year period the returns are far less exciting. Since September 2018, the shares have fallen around 15%. This means if I had invested £1,000, I would be left with £850 today.

What’s more, the FTSE 100 is up almost 4% over the same period. This means that Tesco shares have vastly underperformed against the UK market. Past performance is no indication of future returns, however, I always bear in mind a stock’s historic performance ahead of adding it to my portfolio.

Current value

At today’s price of 265p, the shares trade on a lofty price-to-earnings ratio of 26. This is significantly higher than the FTSE 100 average of 14. For context, competitor J Sainsbury, which has also seen a strong performance so far in 2023, trades on a P/E ratio of 28. This signifies to me that Tesco stock is priced broadly in line with its peers. Knowing this, I feel more comfortable about the punchy multiple.

Although the valuation may seem high, Tesco does offer a very healthy dividend yield of 4.11%. This could be great for adding some passive income to my portfolio.

Cost-of-living crisis

One thing that does concern me is the wider macro environment and how this may filter into everyday consumer spending. Although inflation has tapered off in the UK in 2023, it still remains high at 6.5%. Rising prices have pushed up the cost of groceries and other goods, fuelling the cost-of-living crisis.

As high prices persist it may push customers towards budget supermarket chains like Lidl and Aldi, resulting in loss of market share for Tesco.

That being said, Tesco still holds a whopping 27% share of the UK grocery retail market. Although this has shrunk by a few percentages in recent years, I cannot see the UK market leader losing its title any time soon.

Would I buy the stock?

Tesco has had a solid run so far in 2023 and continues to offer a healthy dividend to investors. That being said, I find it hard to ignore the punchy valuation of the stock, even if it’s in line with competitors. In addition to this, if sustained high prices persist, I think the supermarket chain will struggle to grow its market share. There are some positives for the stock, but for me, these aren’t enough to tip the dial in favour of buying the shares.

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.

Dylan Hood has no position in any of the shares mentioned. The Motley Fool UK has recommended J Sainsbury Plc and Tesco Plc. 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

Investing Articles

5 steps to start buying shares with under £500

Learn how this writer would start buying shares with a few hundred pounds in a handful of steps, if he…

Read more »

Young happy white woman loading groceries into the back of her car
Investing Articles

The FTSE 100 offers some great bargains. Is this one?

Our writer digs into one FTSE 100 share that has had a rough 2024 to date, ahead of its interim…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

£9,000 of savings? Here’s my 3-step approach to aim for £1,794 in passive income

Christopher Ruane walks through the practical steps he would take to try and turn £9,000 into a sizeable passive income…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

I’d buy 29,412 shares of this UK dividend stock for £150 a month in passive income

Insiders have been buying this dividend stock, which offers an 8.5% yield. Roland Head explains why he’d choose the shares…

Read more »

Red briefcase with the words Budget HM Treasury embossed in gold
Investing Articles

Could the new UK budget spell growth for these 6 FTSE stocks? I think so!

Mark David Hartley considers six UK stocks that could enjoy growth off the back of new measures announced in the…

Read more »

Investing Articles

With a 6.6% yield, is now the right time to add this income stock to my ISA?

Our writer’s looking to boost his Stocks and Shares ISA. With this in mind, he’s debating whether to buy a…

Read more »

Dividend Shares

This blue-chip FTSE stock just fell 12.5% in a day. Is it time to consider buying?

Smith & Nephew is a well-known, blue-chip FTSE stock with a decent dividend yield. And its share price just dropped…

Read more »

Investing Articles

At 72p, the Vodafone share price looks to be at least 33% undervalued to me

Our writer looks at a number of valuation measures to determine whether the Vodafone share price reflects the fair value…

Read more »