Image source: Getty Images
Tesco (LSE: TSCO) shares have had a great run so far in 2023. Since the start of the year, the stock is up 16%, compared to the FTSE 100, which has risen by just 0.6% over the same period. Extending this timeframe to 12 months, the shares have returned a healthy 32%, outperforming the Footsie by almost 21%. At today’s price of 265p, should I be looking to add this stock to my portfolio? Let’s investigate.
Historic returns
Although the stock has performed well in 2023, over a five-year period the returns are far less exciting. Since September 2018, the shares have fallen around 15%. This means if I had invested £1,000, I would be left with £850 today.
What’s more, the FTSE 100 is up almost 4% over the same period. This means that Tesco shares have vastly underperformed against the UK market. Past performance is no indication of future returns, however, I always bear in mind a stock’s historic performance ahead of adding it to my portfolio.
Current value
At today’s price of 265p, the shares trade on a lofty price-to-earnings ratio of 26. This is significantly higher than the FTSE 100 average of 14. For context, competitor J Sainsbury, which has also seen a strong performance so far in 2023, trades on a P/E ratio of 28. This signifies to me that Tesco stock is priced broadly in line with its peers. Knowing this, I feel more comfortable about the punchy multiple.
Although the valuation may seem high, Tesco does offer a very healthy dividend yield of 4.11%. This could be great for adding some passive income to my portfolio.
Cost-of-living crisis
One thing that does concern me is the wider macro environment and how this may filter into everyday consumer spending. Although inflation has tapered off in the UK in 2023, it still remains high at 6.5%. Rising prices have pushed up the cost of groceries and other goods, fuelling the cost-of-living crisis.
As high prices persist it may push customers towards budget supermarket chains like Lidl and Aldi, resulting in loss of market share for Tesco.
That being said, Tesco still holds a whopping 27% share of the UK grocery retail market. Although this has shrunk by a few percentages in recent years, I cannot see the UK market leader losing its title any time soon.
Would I buy the stock?
Tesco has had a solid run so far in 2023 and continues to offer a healthy dividend to investors. That being said, I find it hard to ignore the punchy valuation of the stock, even if it’s in line with competitors. In addition to this, if sustained high prices persist, I think the supermarket chain will struggle to grow its market share. There are some positives for the stock, but for me, these aren’t enough to tip the dial in favour of buying the shares.
