It looks like Tesco (LSE:TSCO) shares are going to finish 2023 as the 23rd best performers on the FTSE 100.
For a business that’s been around for 104 years, and one that operates in a sector that isn’t known for its rapidly growing companies, this bodes well for the coming year.
Repeating this performance in 2024 would result in a share price of 365p.
However, if this is to be achieved, I believe the company needs to — as a minimum — retain its current market share. It must also address some other issues concerning its growth plans and dividend.
Still the biggest
Kantar regularly publishes reports on the performance of supermarkets. For the 12 weeks ended 26 November 2023, it said Tesco was the largest, with a 27.5% market share. This has changed little over the past five years (12 weeks to 2 December 2018: 27.6%).
Over this period, the UK’s biggest grocer has successfully managed to counter the threat of the so-called discounters, like Aldi and Lidl.
If it can keep its current share in a market that’s growing, it will continue to steadily increase its revenue and earnings.
What’s the company worth?
However, supermarket valuations vary widely.
Walmart, the largest in the US, has a price-to-earnings (P/E) ratio of 22. France’s equivalent — Carrefour — trades at 8 times earnings.
Tesco’s P/E ratio is currently 12.
Based on these numbers, its shares could be valued anywhere between 195p and 511p.
However, assuming its earnings multiple remains unchanged, it will need to increase its earnings by £440m, to reach a share price of 365p.
This will be difficult.
Other activities
To help boost its profits, Tesco has diversified into mobile phones, banking, and insurance.
Personally, I think these are a distraction and add little to its stock market valuation.
If I was in charge, I’d be looking to sell its joint venture with O2. The latest accounts reveal a profit of just £8m, earned from revenue of £970m. To me, this seems like a lot of effort for little reward.
Interestingly, it’s rumoured that the directors are looking to sell Tesco Bank for around £1bn. The division accounted for only 8.7% of the group’s operating profit during its 2023 financial year, so it won’t be missed.
In my opinion, Tesco should concentrate on doing what it does best, which is selling food and drink.
Prospects for the coming year
I think the company’s shares could reach 365p in 2024. But any sign of a downturn in its market share would make this unlikely.
Also, I think the directors need to better explain how they plan to grow the business. Organic growth will not be sufficient.
A major UK acquisition is likely to be blocked on competition grounds, so buying overseas seem logical.
The money from the disposal of its banking arm could be used to fund this, and help add to its existing 700 stores in Ireland and Eastern Europe.
But if the share price is to move higher, I’m convinced that the company needs to increase its dividend. It’s likely to pay 10.9p a share for its current financial year. This implies a yield of 3.8%, a fraction below the FTSE 100 average of 3.9%.
But if the shares did reach 365p, the stock would be yielding a miserly 3%.
