Tesco (LSE: TSCO) shares have surged 106% over the past five years, with dividends added on top, defying expectations of a stock many had written off.
The FTSE 100 grocer was once viewed as a stodgy blue chip whose best days were firmly behind it, weighed down by the troubled Philip Clarke tenure that saw the UK’s top grocery chain slip from potential world beater to sector flop.
Sir Dave Lewis righted the ship in 2014, and current chief executive Ken Murphy continued that recovery work from October 2020, navigating a series of significant macroeconomic challenges along the way.
Murphy identified potential Brexit tariffs, an economic recession, and the continued impact of the Covid pandemic as his major challenges upon taking the role, while investors pressed for dividend restoration and the sale of Tesco’s banking arm.
The bank was sold to Barclays in November 2024, while operations in Thailand, Malaysia, and China were offloaded in 2020, leaving Tesco focused primarily on the UK, the Republic of Ireland, Hungary, the Czech Republic, and Slovakia.
Dividends have increased at a compound annual rate of 9.6% over the last five years, though the path has been uneven, reflecting a turbulent period marked by the Ukraine war, a cost-of-living crisis, and post-pandemic supply chain disruption.
Statutory pre-tax profits have reflected those pressures, with 2022/23 proving particularly difficult at £1.005bn, compared to £2.403bn in the most recently reported financial year, £2.214bn the year before, £2.289bn the year prior to that, and £2.033bn in 2021/22.
The share price is up 12.6% over the last year, though the pace of growth is slowing and the stock slumped 10.5% in May as the cost-of-living crisis flared up again due to Iran, making it one of only two FTSE 100 stocks to perform worse during that period.
Tesco continues to dominate the UK grocery market with a 28.2% share, well ahead of second-placed Sainsbury’s at 15.2%, though German discounters Aldi and Lidl have both overtaken Morrisons and represent a persistent competitive threat.
The grocer must also absorb a series of government-driven cost pressures, including higher employer National Insurance contributions, inflation-busting minimum wage increases, and the threat of price controls, all while operating on wafer-thin margins of around 3%.
With a price-to-earnings ratio of 14.9, Tesco is more expensive than it has been historically, while the trailing dividend yield currently stands at a steady 3.37%, offering some income support for patient investors.
Times remain tough across consumer stocks broadly, and while Tesco has demonstrated a remarkable ability to adapt and deliver shareholder returns, the current valuation and macroeconomic backdrop suggest potential investors may benefit from waiting for a more attractive entry point.