Can the Tesco share price double your money?

Does it make sense to say Tesco plc’s (LON:TSCO) stock will one day be trading at 500p?

| 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.

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.

It’s hard to say how Tesco (LSE: TSCO) shareholders should be feeling these days. On the one hand, trading has been buoyant, evidenced by this month’s thoroughly decent set of results which showed a 6.7% increase in first-half profits to £494m. 

On the other, the decision by CEO Dave Lewis to stand down after five years in charge has come as a shock to the market. Lewis has been credited with turning the company around following its accountancy scandal through a combination of cutting costs, the canny acquisition of Booker, and taking the battle to discounters Aldi and Lidl through the opening of Jacks.

Given the above, I’m asking whether it makes sense to say the business could double your money in time.

Reasons to be optimistic

In contrast to other top-tier firms who’ve recently lost their leaders, the way in which Lewis’s departure has been handled so far has been exemplary. Certainty over his successor (Ken Murphy) should help stabilise the share price and potentially succeed in bringing new investors on board, even if the new CEO faces the daunting challenge of keeping operating margins as high as they’ve been.

Another reason relates to Tesco’s defensive qualities. Put simply, people will always need to eat. Should the UK economy enter a prolonged sticky patch — Brexit-induced or otherwise — it doesn’t seem fanciful to suggest that a lot of investors might gravitate towards boring old food retailers. The fact Tesco continues to be the market leader by some margin may also be enough to convince prospective buyers it’s the safest horse to back. 

And then there’s Tesco’s income credentials. Having been understandably cut by Lewis during the difficult years, dividends are back on the menu and quickly rising. This year’s mooted 8.1p per share cash return will be 41% higher than the previous year and would equate to a yield of 3.4% at the current share price. What’s more, this payout is likely to be covered just over twice by profits. 

So, why might it not happen?

A simple argument against Tesco doubling your money relates to its size. With a market capitalisation approaching £24bn, asking the FTSE 100 juggernaut’s shares to rise 100% from here might be asking too much, particularly given that competition in this industry remains so fierce. 

Yes, the aforementioned market share is appealing, but the possibility of rivals merging in the future shouldn’t be ignored simply because the Asda/Sainsbury tie-up was blocked. Should online giant Amazon step up its assault on the established firms, for example, things could suddenly become very tricky indeed.

History is also against the share price doubling. In the last 20 years, the stock has never breached the 500p mark. And, right now, I just can’t identify a catalyst that will generate such massive appreciation.

Lastly, there’s the valuation. Based on analyst expectations, the stock changes hands at 14 times earnings for FY20. That’s fairly average compared to the market in general, but it’s on the pricey side compared to its biggest rival Sainsbury’s, on a forecast price-to-earnings (P/E) ratio of 11.

In sum, I’m struggling to see how Tesco will double your money on anything but the very long term. That said, it would certainly be my preferred pick from the sector if I was looking for sustainable and growing dividends.

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.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. 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

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

To build a passive income flow, I’d follow this Warren Buffett approach

Warren Buffett has set up passive income streams most people can only dream about. Our writer sees some practical lessons…

Read more »

Growth Shares

As the boohoo share price falls, could it become a penny stock in 2025?

Jon Smith outlines some of the recent problems involving the boohoo share price and considers if things could get even…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Here are the worst-performing FTSE 100 shares over the last 5 years

These five FTSE 100 shares have been complete duds over the last half decade. But is there potential for a…

Read more »

Investing Articles

Nvidia stock has tripled this year! Can it keep rising?

Nvidia's latest sales update showed strong growth and the stock's been on a tear so far in 2024. So is…

Read more »