Tesco (LSE: TSCO) shares have tended to trade in line with the FTSE 100 over the last few years. More recently though, they’ve been left behind a bit as the blue-chip index has rallied to record highs.
For example, the FTSE 100 is now up 9.5% in five years compared with Tesco’s 9% decline. Year to date, the index has risen just over 5% versus a 1.7% drop in the Tesco share price.
However, none of these figures include dividends. So here, I’ll look at how much income I’d get from £10k worth of shares and consider whether that’s enough to persuade me to invest in them.
A resilient showing
To be honest, I’m a little bit surprised at this underperformance from Tesco stock. After all, it gained a bit of market share last year and there was a return to positive volume growth as inflation started to ease.
Group sales excluding VAT and fuel rose 7.2% year on year to £61.5bn. And adjusted diluted earnings per share increased 14% to 23.41p.
I thought the market would have rewarded the stock a bit more for this strong financial performance.
Competition and low growth
I’m a Tesco customer — kept loyal by the Clubcard — and I think the company has worked hard to reduce prices from the shocking inflation we all suffered in early 2023.
Then again, I was visiting my aunty recently and we shopped at her local Morrisons. I was also impressed with the pricing and range on offer in there. Perhaps I’m just easily impressed.
Or perhaps this speaks to a wider issue, which is that UK supermarket chains are incredibly well-oiled machines these days. Most shoppers are creatures of habit and tend to stick to what they know (usually the closest well-run store). My aunty has shopped in that Morrisons for decades.
Which is to say, market share gains in this industry are usually accumulated at a glacial pace. The German discounters are an exception, as they quickly gained market share during the cost-of-living crisis. But how much more market share Aldi and Lidl take from this point remains to be seen.
This is an incredibly competitive industry and there just isn’t that exciting growth to get investors’ juices flowing.
Unappetising dividend yield
Meanwhile, the forecast dividend yield for this financial year (which started in March for Tesco) is 4.4%.
This means I could expect to receive around £440 in passive income from a 10 grand investment in the shares.
That’s not much more than the FTSE 100 average of 3.9%. And it doesn’t seem very attractive when dividends aren’t guaranteed and I can currently get similar or even better returns sitting in cash.
I’m looking elsewhere
Now, this isn’t to say that Tesco isn’t a great company. It clearly is because it still reigns supreme after all these years, and despite all the competition. I expect it to remain tog dog for many years.
But I don’t see any meaningful catalysts on the horizon to jolt the shares upwards. And while I do think the dividends look reliable and could therefore play a role in a diversified income portfolio, I’d rather invest elsewhere.
There are other FTSE 100 stocks offering higher yields and likely better growth prospects right now.
