Tesco (LSE: TSCO) shares have had an impressive run in 2023. The UK’s largest grocery retailer has seen its shares climb over 26% year-to-date, including 10% in the last six months. If I had invested £1,000 this time last year, I would have earned myself a healthy £277 return – and that’s before the dividend.
So, it seems I missed out on this stock. However, should I be buying now to avoid the same mistake? Let’s take a closer look at Tesco’s performance this year.
Greedy shopper
With the cost-of-living crisis sustaining high prices for most of 2023, supermarkets like Tesco have been criticised for charging higher than required prices on its goods – a process called ‘greedflation’ by much of the media.
Critics argue that the recent price hikes are unjustified, alleging that large corporations exploit the expectation of rising prices by increasing them beyond what’s necessary to cover expenses. Tesco has refuted these allegations, citing reduced margins and net income as proof.
However, despite these claims, the company generated billions in profits last year, raised dividends, and initiated a £750m share buyback. Such stellar financial results appear out of touch when many people are experiencing significant increases in their weekly shopping expenses.
That being said, Tesco may pull back from some of its price hikes given recent positive inflation data across the globe. In the US it was announced that headline inflation fell to 3.1% in November. This has also been the case closer to home, with CPI inflation in the UK at 4.7% in October versus 6.3% the prior month.
Thoughts on value
Tesco shares currently trade on a price-to-earnings ratio of 14.8. This is pretty much in line with the FTSE 100 average and doesn’t fill me with excitement. However, competitor J Sainsbury trades on an astronomical P/E ratio of 95, so perhaps Tesco shares could be undervalued. Given wider and historic valuation metrics, however, I am not so sure.
Tesco also offers a healthy dividend of 3.8%. Again, this is pretty much in line with the FTSE 100. However, analysts have projected that this figure could rise to 4.5% in 2024 and again in 2025. Under normal circumstances, I would be impressed with this figure as a passive income generator. However, with current UK interest rates at over 5%, I could make a higher guaranteed return on my savings that way. Therefore, while it’s a healthy sum, it is not enough to tip the dial for me.
There is no doubt that Tesco dominates the UK retail sector with a 27% market share, overshadowing its closest competitor, J Sainsbury at 15%. Its size gives it advantages in scale and brand recognition over rivals. Tesco has also managed to retain this customer base despite the cost-of-living crisis and the rise of budget supermarkets like Aldi and Lidl.
So am I missing out?
I don’t think I’m missing out by not buying. Tesco is a household name with a leading UK presence. However, nothing jumps out at me making me want to buy the shares. Fair value and an average dividend aren’t signs I’m missing out on much. Therefore, I won’t be buying the shares today.
