Tesco (LSE:TSCO) shares have been on quite a roll, rising by around 23% over the last 12 months. That means anyone who invested £5,000 a year ago is already sitting on close to £6,150. And that’s before counting dividends.
But the question now is, how much higher could Tesco shares climb from here?
What analysts are saying
Two major institutions have weighed in this year with compelling price targets. Deutsche Bank reiterated its Buy rating in April with a 525p target. Then, just last month, Morgan Stanley initiated coverage with an Overweight rating and a 560p target, describing Tesco as a top pick and predicting it will outpace UK grocery rivals as food inflation rises to roughly 5.9% in 2027.
Morgan Stanley specifically highlighted Tesco’s growing market share, pricing and data advantages, online growth, and a burgeoning retail media operation as the key drivers behind what it calls a “step-up in earnings power”.
So what does this mean in practice? At today’s share price of 474p, a £5,000 investment buys around 1,055 shares. If Morgan Stanley’s forecast of 560p proves accurate, then those shares will become worth £5,908, a gain of roughly £908, or 18.2%, before dividends.
At Deutsche Bank’s more conservative 525p target, the same investment would be worth £5,539, a gain of £539, or 10.8%.
What the latest results revealed
These bullish forecasts aren’t built on air, as the underlying numbers back them up.
Tesco’s full-year preliminary results, published in April, showed group sales growing 4.6% to £66.6bn, adjusted diluted EPS rising 6% to 29p, and dividends climbing a solid 5.8% to 14.5p. What’s more, UK market share reached its highest level since 2016 at 28.5%, and free cash flow came in ahead of guidance.
Put simply, Tesco’s doing exactly what a market leader should do… and it’s doing it consistently.
Where’s the risk?
The most obvious headwind is cost inflation. National Insurance increases, regulatory pressures, and wage growth are all squeezing operating margins from below. And while Tesco has so far offset these pressures through an extended savings programme, any acceleration in cost inflation could limit the pace of earnings growth that the bullish analyst targets depend on.
There’s also the question of valuation. The forward price-to-earnings (P/E) ratio currently sits around 15.3 times.
For a supermarket that’s quite a premium price tag. And it means that any slip in trading momentum could weigh negatively on the share price in a short space of time. And it’s why another team of analysts at Jefferies is being far more conservative with their 12-month share price forecast, placing it at 430p with a Hold recommendation.
So which forecast should investors listen to?
The bottom line
Tesco shares are backed by the strongest market share position in a decade, a management team consistently delivering ahead of guidance, and two major institutional analysts pointing toward meaningful upside from here.
However, these forecasts are dependent on Tesco protecting its profit margins, which isn’t a guaranteed outcome. Therefore, I think there’s a good chance Tesco shares could end up falling short of these bullish targets.
Nevertheless, I’m optimistic that a meaningful opportunity for long-term dividend growth might exist here. That’s why I think Tesco shares deserve a closer look.
Should you invest £5,000 in Tesco Plc right now?
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And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Tesco Plc made the list?
Zaven Boyrazian does not hold any positions in the companies mentioned.
