The last 12 months have been a fantastic time to own Tesco (LSE:TSCO) shares. The UK’s dominant supermarket giant has delivered a 36.5% return for shareholders since April 2025. And for anyone who’s been reinvesting the dividends paid along the way, the total return is closer to 41.6%.
That’s enough to turn a £5,000 initial investment into as much as £7,080. But with so much growth under its belt, is it too late for new investors to buy shares today? Or could the FTSE stock continue to climb higher from here?
More momentum ahead?
Despite already having a lot of growth under its belt, Tesco shares continued to march higher last week on the back of its latest full-year results. And with the group’s performance exceeding analyst expectations across multiple metrics, it isn’t hard to understand why.
The retailer continues to take even more market share from its rivals, with free cash flow reaching £1,957m. That’s up 11.8% compared to a year ago which, for a mature volume-based business facing rising labour costs, is pretty exceptional.
What’s more, it’s prompted management to upgrade its medium-term guidance to deliver between £1.5bn and £2.0bn in free cash flow each year, up from an original target range of £1.4bn to £1.8bn. And with more excess capital being generated, the prospects for store network expansion, higher dividends, and more aggressive buybacks look quite promising.
In other words, Tesco’s growth story looks far from over. But not everything in these results was hunky dory.
What to watch
While Tesco showed confidence in its medium-term trajectory, the near-term outlook was far more cautious.
In the words of management: “Reflecting the increased uncertainty caused by the conflict in the Middle East, we are providing a wider range of guidance than we were previously planning”.
While free cash flow is on track to match the firm’s new medium-term targets, underlying operating profits look like they could be fairly flat, landing between £3.0bn and £3.3bn for the group’s 2027 fiscal year (ending in February). For reference, in its 2026 fiscal year, underlying operating earnings reached £3,152m.
This also suggests that cost pressures might be starting to catch up with the business. Revenue and cash generation continue to grow at a robust pace, but core earnings are proving more sluggish, both from the previously mentioned headwind of rising costs and price undercutting from its competitors such as Asda.
So where does this leave investors today?
What’s the verdict?
Providing Tesco doesn’t start losing its footing against its increasingly competitive rivals, the group’s free cash flow expansion and market share gains suggest the company remains a high-quality compounder even at a more premium valuation.
The threat of potential margin compression might trigger a bit of profit-taking activity, especially if the geopolitical landscape continues to escalate. However, with impressive operational momentum, such dips may simply create ideal entry points for investors looking to add Tesco shares to their portfolio.
With that in mind, I think this business still has much to offer and is worth deeper investigation.
