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Tesco (LSE: TSCO) shares have had a brilliant run lately, and the same goes for another solid and established FTSE 100 household name, Aviva (LSE: AV).
The Tesco share price has climbed 103% over the last five years. In the last 12 months it’s up about 18%. Aviva’s done even better. It’s up 130% over five years, and 34% in the past year.
Dividends will have boosted the total return. Today, Aviva offers the superior trailing yield at 5.4%, Tesco’s lower at 3.1%. Just a year or two back they paid even more income, but yields have been squeezed by rising share prices.
Top FTSE 100 stocks
Tesco’s performance is impressive because it’s come against the backdrop of the cost-of-living crisis, which has squeezed shoppers. It also has to fight one supermarket price war after another, the latest driven by Asda’s attempt to recapture lost share.
As the UK’s biggest employer, Tesco was also hit by April’s increase to employers’ National Insurance, and a large jump in the Minimum Wage. Yet with market share back to 28%, it’s more than holding its own.
Aviva has been boosted by the industry-wide rise in general insurance premiums, notably in motor cover, and rising inflows to its wealth management division. The £3.7bn purchase of Direct Line has been well received by the market so far.
As an asset manager, it remains at the mercy of wider stock market volatility, and also operates in a competitive sector where new opportunities such as bulk annuities attract a lot of interest from rivals.
Price-to-earnings ratios
Neither stock can now exactly be described as a bargain. Tesco has a price-to-earnings (P/E) ratio of 15.8, just above the FTSE 100 average, but high expectations have pushed Aviva’s P/E up to around 27. It really can’t afford slip-ups at that valuation.
So have these two got more fuel in the tank? That’s my concern today, and it seems to be reflected by brokers. Consensus has produced a median 12-month share price forecast growth of just 1.5% for Tesco, which would lift the share price to 446.3p. Throw in the forecast yield of 3.2% and the total return climbs to 4.7%. That would turn a £10,000 investment into £10,470.
Consensus forecast for Aviva is even more dour, with predicted growth of just 0.06% to 671.2p per share. At least the forecast yield’s higher at 5.83%, which would lift the total return to 5.89%. That would turn £10k into £10,589, which isn’t the end of the world, but feels flat given recent fizz.
Looking for recovery plays instead
Neither surprises me. The UK economy is still bumpy, and making substantial progress won’t be easy given the uncertain backdrop.
I still think both are worth considering, but they may take a few years to prove their mettle, so I’d only consider buying with a minimum five-year view.
I think there are more exciting opportunities out there for contrarians happy to buy out-of-favour stocks in the hope that their fortunes rebound. That’s where I’ll be focusing my efforts.
However, I should also say that I’m no oracle. I certainly didn’t expect Tesco and Aviva to do as well as they’ve done. Otherwise I’d have bought them. Every investor will take their own view.
