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Are Tesco shares a bargain buy or a busted flush?

Young Caucasian man making doubtful face at camera

In the second half of this year, my wife and I have been eagerly buying new shares for our family portfolio. One large-cap stock I’ve been watching closely lately is Tesco (LSE: TSCO) shares, which I’ve thought about adding to our collection.

Tesco shares are having a tough 2022

In early 2022, it looked like Tesco shares were set to have a good year. On 31 December 2021, they closed at 289.9p. They then hit their 2022 high of 304.1p on 28 January. So far, so good.

But then along came Vladimir Putin to spoil the party, when Russia invaded Ukraine on 24 February. This sent global stock prices tumbling, dragging Tesco shares down with them. Here’s how this popular and widely held FTSE 100 share has performed over the short and medium term (based on the current TSCO share price of 236.6p):

One day -0.4%
Five days +2.5%
One month +12.2%
Six months -7.3%
2022 YTD -18.4%
One year -15.6%
Five years -4.4%

My table shows that Tesco shares have lost almost a sixth of their value over the past 12 months, plus they are down almost 5% over five years. However, the above returns exclude cash dividends, which would boost these results by a few percentage points per year. Even so, Tesco stock has mostly been a disappointment over the past half-decade.

I missed a great opportunity to buy Tesco

At their 52-week low on 13 October, shares in the UK’s #1 supermarket crashed to a low of 194.35p. At this price, I’d happily have bought into the giant grocer. But I missed this golden opportunity and the stock price has since risen by over 42p — leaping more than a fifth (+21.7%). Drat.

But history shows me that it’s perfectly fine to invest in a great business at a reasonable price. So how do Tesco shares stack up today? At the current Tesco share price of 236.6p, this stock trades on a price-to-earnings ratio of 19.1, for an earnings yield of 5.2%. This is more expensive than the wider FTSE 100 index (14 and 7.2% respectively).

Then again, Tesco’s dividend yield of 4.9% a year comfortably beats the Footsie’s yearly cash yield of 3.8%. Alas, this payout is covered only 1.1 times by earnings, which is a very narrow margin of safety. To be honest, I’d prefer much higher dividend coverage.

I’ll avoid Tesco for now

At its current market valuation of £17.5bn, Tesco towers over its smaller supermarket rivals. But it is losing its once-mighty market share to German discounters Aldi and Lidl. Indeed, my wife now does our weekly shop at the local Lidl (for value) and Waitrose (for quality), rather than big supermarkets nearby.

What’s more, British consumer confidence has collapsed, hammered by soaring inflation, sky-high energy bills, and rising interest rates. And with an economic recession looming, I expect retailers’ earnings to be hit in 2023. And for these reasons, I won’t buy Tesco shares in for now!

The post Are Tesco shares a bargain buy or a busted flush? 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.