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Should I invest in Tesco shares while they’re rising?

White middle-aged woman in wheelchair shopping for food in delicatessen
White middle-aged woman in wheelchair shopping for food in delicatessen

This year has been turbulent for shareholders of Tesco (LSE: TSCO) whose shares have taken a beating since late January. But with the share price bouncing back from October’s low, is now the time for me to buy?

Tesco shares see-saw

This calendar year, the shares have been pretty volatile, while underperforming the wider FTSE 100 index. Here’s how they’ve performed over the short and medium term, based on the current share price of 228.5p (which values this business at just under £17bn):

One day

0.4%

Five days

4.1%

One month

10.9%

Six months

-17.1%

2022 YTD

-21.1%

One year

-16.9%

Five years

2.2%

My table shows that the share price has dived by more than a fifth in 2022. However, it has bounced back over the past month, plus it eked out a small positive return over the last half-decade. These returns exclude cash dividends, which make up a substantial proportion of long-term returns from the shares.

At their 52-week high on 28 January, Tesco shares briefly climbed to their 2022 peak of 304.1p. Alas, less than a month later, Russia invaded Ukraine, sending global stock markets spiralling southwards. At its 52-week low on 13 October, the giant grocer’s stock crashed to a rock-bottom price of 194.35p.

Are the shares still cheap now?

Four weeks ago, if I’d spotted that the stock had slumped below £2, I’d have waded into the market to buy a stake in the UK’s leading supermarket. Indeed, at under 195p, I’d have considered it to be almost dirt cheap.

However, since hitting a 2022 low, the shares have rebounded to 228.5p, a rise of 17.6% in four weeks. Obviously, this leaves the shares more expensive — and for me, less attractive — than they were in mid-October. But would I still buy at the current price?

As I write on Tuesday lunchtime, Tesco shares trade a price-to-earnings ratio of 18.4, which translates into an earnings yield of 5.4%. To be honest, this yield is lower than I’d prefer, given that the wider FTSE 100 offers an earnings yield above 7% a year. In other words, the shares are ‘more expensive’ than the Footsie as a whole.

However, what keeps drawing me to Tesco is its market-beating dividend yield of 5.1% a year. This cash yield is a full percentage point ahead of the FTSE 100’s. Then again, the dividend is only covered 1.1 times by trailing earnings, which isn’t much of a margin of safety.

I’ll pass (for now)

Summing up, I see these shares as neither too cheap nor too expensive. I like the look of the dividend yield, but I’d prefer higher dividend cover from earnings. Hence, I’ve decided not to buy shares in Tesco for now. Also, with sky-high inflation, crippling energy bills and rising interest rates hammering consumer spending, it could a tough 2023 for Britain’s supermarkets.

The post Should I invest in Tesco shares while they’re rising? appeared first on The Motley Fool UK.

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Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2022