Image source: Unilever plc
tesco (LSE:TSCO) shares have not always outperformed FTSE 100 in recent years. The UK's leading supermarket has largely abandoned its international growth plans, causing its share price to diverge.
However, that trend has reversed dramatically more recently. Over the past year, Tesco's share price has risen 35% and as I write it now sits at 361p. That crushes the FTSE 100's 9.4% return over this time.
In fact, the stock is now at its highest level in 10 years!
This means a five grand investment made just 12 months ago would now be worth around £6,750. Adding up dividends since then, my total return would be just under £7,000. Nice.
Unfortunately, a year ago I did not invest in Tesco shares. was loading Legal and general for dividends while it was yielding 9%. However, it's still delivering that return today, with the stock up a measly 3% in a year.
Clearly, you would have been much better off investing in Tesco for a 12 month outperformance.
Why are Tesco shares rising?
There are several reasons why investors have become bullish on stocks. First, inflation has been cooling in recent months and it seems likely that interest rates are falling.
As bag strings loosen, some shoppers feel a little more confident putting more items in their basket. I know, compared to when cheese and olive oil prices skyrocketed a couple of years ago!
Furthermore, Tesco maintains its dominant position as the UK's leading supermarket. In fact, it is actually gaining market share. According to Kantar, it now accounts for 27.8% of all grocery sales, its highest share since January 2022. This compares to 15.2% for Sainsbury's in second place.
This is important because some investors were concerned that online competitors like ocado and Amazon would steal market share. They may still do this one day, as will Aldi and Lidl through their physical stores.
But for now, Tesco remains the leader.
Strong trade
The company has also reported solid performance. In the 13 weeks to May 25, group sales rose 4.5% year-on-year at constant exchange rates. In the UK, online sales increased by 8.9%, while its business in Ireland recorded its fourth consecutive quarter of volume growth.
Earlier this year, Tesco committed to buying back an additional £1bn worth of shares by April 2025. At this point it will have bought back a cumulative £2.8bn worth of shares since October 2021.
Large stock buybacks like this tend to increase metrics like earnings per share (EPS). This is because there are fewer Tesco shares to distribute the profits among.
Meanwhile, the dividend increased 11% last year. This means the payment is now higher than before Covid.
Will I invest?
Despite its rise, Tesco shares still look reasonably valued to me. The P/E ratio for this year's forecast earnings is around 14. This is in line with the FTSE 100 overall.
If I was looking for a defensive stock for my portfolio, I would consider Tesco. But with the yield at 3.3%, I still resent those higher dividends elsewhere. Maybe I'll regret it again in a year.