How has the Tesco (LSE: TSCO) share price done over the past few years? Very well, as it turns out!
Strongly outperforming its benchmark index
In fact, over the past five years, the Tesco share price is up by 95%. During the same period, the FTSE 100 index of leading British shares (of which Tesco is a constituent member) is up 46%.
So Tesco’s share price gain during that period is slightly better than double that of the index. In financial terms, that means that £10,000 invested in the grocer five years ago (in June 2021) ought now to be worth around £19,500.
Attractive dividend opportunity
On top of that, a long-term shareholder would have benefited from passive income streams thanks to the dividends paid by Tesco. Currently, the yield is 3.3%. That is above the FTSE 100 average of 3.1% — not dramatically above it, but still above. So while I do not regard that as extremely appealing, it is still attractive nonetheless.
Remember though, that that dividend yield is for someone buying Tesco shares today – and the price has almost doubled in five years. So someone who invested five years back would now be yielding roughly 6.4%.
That seems like a very attractive dividend to me for a blue-chip business of Tesco’s calibre. It also means that, on top of the capital gains, someone who put £10k into Tesco shares five years ago would since have earned around £2,765 in dividends from them.
The dividend has grown strongly over the past several years and could keep doing so if Tesco’s business performance is good.
Is there an opportunity here now?
Hindsight is a wonderful thing. Clearly, buying at the Tesco share price five years ago and holding the shares until now would have turned out to be a lucrative move.
But I did not do that. What about now? Could it make sense for me to add the share to my portfolio at the current price?
As I see it, Tesco’s strengths as a business now are similar to what they were five years ago, such as its leading position in the UK market and a large base of shoppers and loyalty card users.
But what has changed is the valuation. Earnings have grown: last year’s diluted earnings per share were around 29% higher than they had been five years ago. But that growth is nothing like the growth seen in the Tesco share price. That means the price-to-earnings (P/E) ratio is now higher than it used to be.
I don’t think this looks cheap now
With a P/E ratio of 16, I do not see Tesco as a bargain. In fact, at that valuation, I do not even think the share is attractively priced. After all, this is a mature business in a mature industry that is bedevilled by low profit margins due to intense competition around price.
So for now, I will not be investing. Fortunately, the UK stock market has other retail and consumer goods shares I think currently offer much better value.
Should you invest £5,000 in Tesco Plc right now?
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Christopher Ruane does not hold any positions in the companies mentioned.
