Is the Tesco share price heading back up to 400p?

Supermarket chain Tesco (LSE: TSCO) is popular FTSE 100 shares held by many private investors. But some may be disappointed with the share price performance over the years.

In 2012, shares were above 400p. So the price is now close to 259p representing a drop of over 35%. And that’s not the kind of long-term performance investors expect from stock ownership. After all, due to stable business fundamentals, most stock prices rise because profits and earnings only keep pace with price inflation.

Historical operational issues

But Tesco’s business has not been stable. In fact, it has experienced several operational problems over the past decade. For example, it has withdrawn from many operations abroad. And it dropped the ball on the UK housing market which resulted in profits and a loss of market share. The turnaround from a chaotic situation has been well-reported over the years.

Even today, the business operates in a competitive market with constant threats to market share from lean players such as Aldi, Lidl and others. But, in fairness, the company has held its own quite well recently. And over the past year, the share price has only fallen about 5% after recovering from last year’s fall lace.

But the business will have to find some to get the shares back up to 400p. And the signs don’t look very promising right now. Indeed, the one thing that drives stock prices more than anything else is earnings. But City analysts are not optimistic and have predicted a 13% decline for the trading year that ended in February. And they expect below-average results for the current trading year.

And the outlook for shareholder dividends isn’t much better. Analysts have cut the low single-digit percentages ahead. And that means Tesco fails one of the tests for dividend-led investment. I want shareholder payments to be happy supported by a business that can increase revenue, earnings, cash flow and dividends every year.

Maintain market share

Meanwhile, the expected dividend yield is higher than 4% for the current trading year. But I have long said that I want to return at least 5% of Tesco to compensate me for the risk of holding shares. After all, Tesco is a high-turnover, low-margin business operating in a disorganized market while carrying huge debt. And as such, I see earnings and dividends as vulnerable to damage easily if market conditions should move a little.

However, there are positives. In January, Tesco posted its third quarter figures which were suitable for the Christmas period. And the director said the business maintains a “strong” 27.5% market share. But on top of that, Tesco is the only full-service grocer to increase its market share compared to pre-pandemic figures.

The company also has a tendency to buy back its own shares. And that habit can lead to higher stock prices, over time. But if the stock is going back to 400p, I think it needs all the help it can get.