It has been a good year for Tesco (LSE: TSCO) shares. The company’s share price has touched successive multi-year highs since August 2021. And I think there could be even better times in store for the grocer in 2022 going by its latest trading update.
Tesco’s robust trading update
For the 19 weeks ending 8 January 2022, Tesco reported like-for-like sales growth since both last year and the year before, of 2.6% and 8.2% respectively. Like-for-like numbers are significant for retailers, because they strip out the impact of any closures of existing stores and opening of new ones, which could otherwise skew numbers. Instead, these figures give a sense of how sales are doing across the same stores over time. I particularly like the growth from two years ago, which is the last pre-pandemic data. This suggests that Tesco’s growth spurt last year was not just a one-off phenomenon driven by the lockdowns.
Tesco’s CEO, Ken Murphy, does point out that “COVID-19 led to a greater focus on celebrating at home” in 2021. This gave the company an opportunity to deliver to its customers, and “As a result, we outperformed the market, growing market share and strengthening our value position”. In sum, to me it appears that the grocery retailer has indeed benefited from a bigger customer base during the pandemic, and that includes the holiday season of 2021. But it has also made the most of the opportunity that presented itself.
Better times ahead for the FTSE 100 stock
Because of its continued performance, it also expects slightly higher profits than before. This in particular could drive its share price further upwards. Even with all the increase the stock has seen in 2021, it is not a particularly expensive stock in terms of market valuation. Its price-to-earnings (P/E) ratio is around 19.5 times, which is just north of the ratio for the FTSE 100 index as a whole at 18 times. If its earnings rise, its price could also rise without any impact on the P/E.
A higher profit could also mean bigger dividends. Tesco has a dividend yield of 3.1% at present. This is a bit below the average FTSE 100 yield of 3.4%, so it could do with an increase. Even though, it is far from the worst. As growing stock that also pays non-trivial dividends, it looks quite attractive to me.
Inflation is a risk
I am wary of high inflation, though. With the UK’s last inflation print at a scorching 5% on a year-on-year basis for November, it is no surprise that a number of FTSE 100 companies have talked about it in their latest trading updates. Tesco too, mentions cost pressures in passing. So far though, it appears to have managed them well.
What I’d do
I have long wanted to buy Tesco shares, and now that I am planning my investments for 2022, I think it is a good time to do so on a priority basis.
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Manika Premsingh 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.
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