Image source: Unilever plc
Tesco (LSE:TSCO) shares have spent a few radioactive years in the wilderness following the 2014 accounting scandal. And rightly so, as this shocking incident led to the withdrawal of the investment giant’s dividend, completely destroying the confidence of investors.
But the stock has come back with a bang, up 110% in five years, with growing profits on top. This is more than double the 51% return from FTSE 100before assignments.
Undoubtedly, this is good for long-term shareholders. But where does that leave pay today for new investors?
Two amazing years
If you look at the chart, the stock price started to move higher at the beginning of 2024. In fact, more than 60% of the gains have come in the last two years alone.
Early 2024 was when Tesco announced the sale of most of its banking operations Barclays for £700m. By de-banking, the company has once again become a pure grocer.
However, the supermarket has retained all cash-enabled services, including ATMs, travel funds and gift cards. And Tesco has returned money to investors through share buybacks – another factor that has helped boost the share price.
The stock started to really accelerate in mid-2024 when interest rates were cut from a 16-year high of 5.25%. Lower prices helped ease cost-of-living pressures, allowing consumers to start buying more than just essentials at the grocery store.
Underpinning all of this have been consistent market share gains. In June 2024, Tesco reported that its share had grown ahead of all its key competitors, increasing by 52 points to 27.6%. By Christmas 2025, it had reached 29.4% in the UK, its highest share in ten years.
But where does the stock’s rapid rise leave today’s profit?
Income prospects
Tesco offers a forecast yield of 3.4%, meaning 1,500 shares bought today will pay around £238 in income. At 466p per share, these would be worth less than £7,000.
Now, it is clear that the dividend forecast is not guaranteed. Tesco investors found that out the hard way in 2014/15.
That said, with more focus on grocery operations, Tesco appears to be in a much better position today. The forecasted budget is covered twice by the expected profit, which provides a strong margin of safety.
Is the stock still worth considering?
One area that continues to fascinate me is the online grocery delivery business. In the 19 weeks to 3 January, online sales grew by 11.2%.
A few years ago, CEO Ken Murphy warned that the proliferation of fast delivery startups has the potential to cause supermarkets “death by a thousand nibblesHowever, its express delivery service Whoosh saw sales increase by 47% in those 19 weeks, gaining more than a quarter of a million new customers.
Tesco has successfully used its large store network, turning what was once seen as a disadvantage into an advantage. Most importantly, many customers are not switching mall visits and the numbers show that Whoosh sales are increasing.
The main risk here is rising inflation, fueled by the war in Iran and oil hovering above $100 a barrel. Food and transport costs may also rise, which is not good for consumers or Tesco’s operations.
Despite these risks, I think the shares are still worth long-term consideration, especially for income investors who reinvest dividends.
