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Tesco (LSE: TSCO) shares have increased in price by 54% over the past five years. But £5,000 invested back then would have risen in value to a fair bit more than the implied £7,700. And it’s all because of dividends.
An investor who put down that much cash in late December 2020 could now be looking at a pot worth £9,600. Why so much?
Back in February 2021, Tesco paid a whopping special dividend of 50.93p per share. It came from the cash raised by divesting the company’s operations in Malaysia and Thailand, bringing an end to a turbulent period of trying to get in on booming SE Asian retail.
The share price dipped at the time as a result, but it was clearly for a good reason. And that highlights a good lesson. Anyone who just sold because the price fell a certain amount would have missed the bigger picture.
I say Tesco did exactly the right thing. Overseas expansion was risky and faced competition from locals who knew their markets better. Do we really need the UK’s biggest groceries seller to take chances by venturing into tough markets were it has no competitive edge? I don’t think so.
Annual payouts
That special dividend boosted ordinary annual dividends in the years since to provider shareholders with 109p per share in cash. And it’s enough to hand our £5,000 investor an extra £1,900.
That’s a total return of 92% in five years from investing in such a boring company. When it’s arguably the best in its business in the UK, it really can pay well. Oh, I nearly forgot, shareholders ploughing all their dividend cash back into new Tesco shares would have more than doubled their total investment today.
Who needs excitement when we can have dull, boring cash cows like Tesco?
The next five years?
This doesn’t say much about the future, mind. And Tesco is facing some familiar old threats again. Its UK market share has reached 28.3%, according to the latest Kantar data. But it looks like it might be stuck around there. And after a few years of fading from the competitive scene a bit, cheapies like Lidl and Aldi are helping erode profit margins once again.
At interim results time in October, Tesco reported an adjusted operating profit increase of just 1.5%. That doesn’t even match inflation, even though sales rose 5.1%. Statutory operating profit fell 0.6%. Margins are clearly being squeezed by supply costs and competition.
Still, forecasts show earnings growing in the next few years. And analysts expect that all-important dividend to keep on rising. And a definite majority of them have Tesco as a Buy.
Bottom line
So yes, Tesco will face hurdles in the next five years, just like the last five. But it overcame those, and I see a good chance it can keep on doing so. Is it a stock to consider? As the UK leader in an essential sector, I think it has to be.
