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Tesco (LSE:TSCO) shares have really kicked on over the past three years. Before that, they had spent the best part of a decade in the wilderness following an accounting scandal that rocked the supermarket giant to its core.
The run has slowed in the last 12 months though. So much so, Tesco’s 13.3% total return is trailing the FTSE 100‘s 19.3%.
Still, that’s enough to have turned £5,000 into almost £5,700, with an interim dividend due in November. The firm’s also committed to buying back more of its own shares through to April 2027. These regular purchases can help support the share price.
Why’s Tesco slowed?
Zooming out, I’m actually quite impressed with how resilient Tesco stock has been. After all, the war in Iran now looks like a multi-year conflict rather than the in-and-out operation that Donald Trump had first presumed.
Consequently, energy, fuel and food prices are expected to go higher in the coming months. According to the Food and Drink Federation, grocery price inflation will exceed 6% by the middle of 2027. Harvest cycles are also being disrupted by draughts, adding to the upwards pressure.
Therefore, the backdrop’s quite tricky for supermarkets. They’re under political pressure to keep prices low, but they have businesses to run and efficiency savings can only stretch so far, even with AI chipping in.
In an ideal world, the government would take radical action to help people (cut income tax, slash fuel duty, etc). But sadly the public finances don’t allow it, so there’s merely tinkering around the edges.
Another issue for Tesco is that industry data from Worldpanel recently showed that its market share slipped for the fourth report in a row. German discounter Lidl is doing well (I recently popped into new store near me, and I was impressed).
What could get the stock firing again?
Is this loss of market share a concern? I don’t think so. Tesco’s share was still a whopping 27.8% in the 12 weeks to 6 September. It remains top dog, supported by its powerful Clubcard.
This loyalty card also produces a massive dataset of customer behaviour. Via its Tesco Media platform, these customer insights are monetised via subscriptions to help brands grow.
Through Tesco, the UK’s largest grocery retailer with over 24 million Clubcard households — representing nearly every home in the UK — Tesco Media offers brands an unparalleled view into the motivations and behaviours of the nation.
Tesco Media
For the foreseeable future though, I don’t see Tesco shares outperforming. There’s just too much uncertainty with food inflation, elevated living costs and next month’s Autumn Budget.
The average price target among City analysts is 516p — just 7.5% above today’s price. And the price-to-earnings ratio is 17.7, which isn’t particularly cheap. A 3% dividend yield’s also about average for the FTSE 100.
If I had bought Tesco stock at a much lower price three years ago (unfortunately I didn’t) then I’d keep holding. It’s a defensive dividend payer with a market-leading position.
However, for fresh capital, I’m unconvinced Tesco is the most attractive option to consider right now. I see other more enticing FTSE 100 income stocks out there…
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Ben McPoland has no position in any of the companies mentioned.
This story originally appeared on Motley Fool
