Tesco (LSE: TSCO) is one of those strange shares for me, like Unilever. It’s a leader in its field, and a very well run company. And I reckon it could make a great cornerstone of any Stocks and Shares ISA.
But even though I rate it so highly, I’ve never bought the stock. I keep thinking I should.
In fact, if I’d thought that a year ago and bought some, I’d have done well.
12-month gain
In the past 12 months, we’ve seen Tesco shares gain 29%. So the £10,000 that I didn’t invest in the stock would have grown to £12,900. If I had.
Oh, and dividends would have added about 4% extra, taking it to around £13,300.
That’s just one year, and we really shouldn’t take too much from that. Over five years, we’re looking at a modest rise of 17%. And that’s barely more than the FTSE 100 average.
Decades, not years
But investments should really be measured in decades. So what does Tesco look like over the very long term?
Since 1988, which is the earliest I can find prices, Tesco shares have gained 745%. The Footsie, by comparison, just 200%.
The index hasn’t done too well in 35 years on that score, but Tesco’s record is quite a bit better. And I’m ignoring dividends here.
Adding dividends
I don’t have records going back that far. But let’s guess at an average dividend yield of 3% per year. I think that seems reasonable.
An additional 3% return, compounded over 35 years, would add about another 180% to those returns.
Adding them up, the total comes to 925%. So the same £10,000 invested in Tesco shares back in 1988 could be worth more than £100,000 today.
Is that the kind of thing that get-rich-quick dreams are made of? No. But getting moderately well off, slowly, comes with a lot less risk.
A safe investment
And an investment in the food business has to be one on the safest, I’d think, especially buying the market leader?
I know Tesco branched out into all sorts of other things over the years, like banking, US retail, Asian retail, and even car sales.
They weren’t all raging successes. And if Tesco had stuck to what it does best, I think that 35-year total return could have been a good bit better.
Good value now?
What about Tesco today, is it good value?
Forecasts put the stock on a fairly modest valuation, with a price-to-earnings (P/E) ratio of 12. Rising earnings could drop it a bit by 2026. And we see a 3.9% dividend yield, growing to 4.8% in the same time.
That’s from a company that enjoys decent cash flow, and should be able to cover its dividend around two times by earnings.
Top of the competition
It’s a hightly competitive business, with profit margins often tight. And I see that as the biggest risk.
But Tesco has been ahead of the game for so long, I can’t see it being knocked off its perch any time soon.
