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tesco (LSE:TSC) shares have had a very good year in 2023. They are up 22.26% in 12 months and 39.8% in five years. Despite a strong November, the FTSE 100 As a whole it has fallen 0.5% in one year and has only risen 11.08% in five.
Anyone who thought the UK's biggest supermarket would weaken under attack by German discounters Aldi and Lidl was wrong.
Its performance is even more impressive given the pandemic, the energy shock and the cost of living crisis. Tesco has proven it has staying power. However, from my point of view, this has several disadvantages.
Have I missed my moment?
I didn't buy Tesco a year ago or five years ago. I never bought stocks so I missed out on the fun. Additionally, its recent strong performance has made its shares a bit more expensive, while dragging down the yield. I have to weigh that against the positive news that Tesco can still deliver.
I've spent the last few months targeting dividend-paying FTSE 100 stocks, so why didn't I buy Tesco? First, because it was looking for companies that did not yet enjoy the favor of the market. Secondly, I focused on ultra-high performance ones. My purchases included Lloyds Banking Group, Smurfit Kappa Group and Taylor Wimpey, which I expect will deliver similar performance to Tesco in the future. Only with higher dividends.
Currently, Tesco shares return a solid 3.9% annually. That is in line with the FTSE 100 average. They are well covered twice by earnings and the outlook also looks positive. The stock is expected to return 4.04% in 2024 and 4.52% in 2025.
Using the 2024 figure, to generate an income of £1,000 from Tesco alone, you would need to buy 8,853 shares at the current price of 279.6p. That would cost me £24,752. I'm sorry to say that's more than I can afford to invest in any stock.
Best value out there
Also, if you wanted to generate maximum income, this is not the stock you would buy. At this time, the insurance conglomerate Phoenix group holdings returns an excellent 10.81%. You would only need to invest £9,251 to earn the same income of £1,000.
Phoenix is also much cheaper, trading at 5.71 times earnings, and its share price has fallen 20.51% in the last year. Tesco is valued at 12.96 times. The price of success.
I'm just using Phoenix as an example of what you could buy. That double-digit performance is not typical and carries risks. However, it also confirms my concern that Tesco shares are not as interesting as I would like them to be. After a good race, I may have missed my moment.
JPMorgan Cazenove just published his opinion, which broadly reflects mine. The broker cut its price target on Tesco from 240p to 230p, warning that disinflation could hit grocery sector sales, margins and like-for-like valuations. He attributed Tesco's recent success to “Executed self-help and macro tailwinds”and said it can be difficult to repeat.
I'm a big fan of Tesco's recent achievements and I'm excited for anyone who took a risk on the stock when I didn't. I just don't think now is the right time to consider buying it. I can see better value out there.