If I’d invested £10,000 in Tesco shares 5 years ago, here’s how much I’d have now

Tesco (LSE: TSCO) shares are down about 5% from their value five years ago in 2018, as you can see from this chart.

So if I had invested £10,000 into Tesco shares five years ago, my share price would have fallen to £9,500. But wait a minute.

Here’s how much £10,000 is worth

Tesco is an income stock. The company excels not in stock price growth, but in dividend policy, which generates cash for shareholders. And Tesco has paid regular and weighted dividends for each of the last five years.

The dividend yield of Tesco shares for the last years is 32.3%. So if I invest £10,000, my share price will increase to £13,230 in total.

Now the return sounds decent, but it may not be as good as it seems at first glance.

A return is lower than average

A useful way to see how the stack is growing is to use the compound annual growth rate or CAGR. This is the average out percentage return per year.

The five-year return of 32.3% is a CAGR of 5.7%. So every year – taking the average – £10,000 in shares becomes £10,570.

The reason I think this is useful for Tesco is because, after years of growth, the company has established itself as an income stock. The recent sale of its Thai and Malaysian operations suggests that management appears to have pulled the plug on expansion. So, the last five years can be the best indication of future returns.

How to stack up? Well, if I expect a CAGR of 5.7% going forward, it will be lower than the historical average FTSE 100 at around 8% or so FTSE 250 in around 10%.

But despite this, there is one important detail about Tesco that I believe has made investors very interested in this stock.

Rise of the budget supermarket

Since 2017, Tesco has maintained the same market share while the other ‘big four’ supermarkets have lost out to budget competitors like Aldi and Lidl. This is a sign of good management that can weather the storm of future cost of living and competition issues.

	Tesco	Sainsbury’s	Asda	Morrison’s	Aldi	Lidl
Market Share (Dec ’22)	28%	15%	14%	9%	9%	7%
Market Share (Dec ’17)	28%	16%	15%	11%	7%	5%

Most of these supermarket chains are privately owned except Sainsbury’s. And if we compare the two, it is interesting to see that the P / E ratio for Tesco (20) is almost twice as high as for Sainsbury’s (10). I suspect Tesco’s resilience to this threat from budget stores plays a big part.

The challenge created by rising inflation presents another problem. Tesco has just announced an extension to its ‘price lock’ until Easter 2023. This measure has reduced earnings even as revenues have increased.

The decision may pay off for the good of customers if inflation is to come down in the future and could be a long-term bonus for stock prices.

All things considered, Tesco would be one to add to my watch list if not an outright purchase.