Prediction: next Christmas, £5,000 invested in Tesco shares could be worth…

From the start of 2025, Tesco (LSE:TSCO) shares have returned 17.1% to investors. Therefore, Â£5,000 invested would have turned into Â£5,852.50.

Doing a quick Google search, the average cost of Christmas for a UK family is around Â£600-Â£700. For higher earners, this can be over Â£1,000. Either way, the Â£852.50 gain would have made a significant contribution.

But if investors put Â£5,000 in Tesco’s shares today, will it help to cover the cost of Christmas by next year?

Valuation and dividends

Right now, Tesco has a forward price-to-earnings (P/E) ratio of 15.2. While this isnât necessarily expensive, itâs not ridiculously cheap either.

However, when compared to fellow Footsie constituent Sainsburyâs, it looks like itâs on the cheaper side. With a P/E of 21.5, Sainsburyâs shares suggest some undervaluation of Tescoâs shares.

Furthermore, after a 12.9% increase in its interim dividend, the companyâs shares now boast a dividend yield of 3.5%. If we combine last year’s final dividend of 9.45p with this year’s interim dividend of 4.8p, we obtain a total annual dividend of 14.25p per share.

Now, with its current share price of 436.24p, investors can buy 1,146 of its shares with Â£5,000. That means, they can obtain Â£163.31 just from the supermarket’s dividends. Therefore, they can rely less on the share price to help pay for next year’s Christmas shopping!

Itâs important to remember that dividends arenât guaranteed. Though, the company does have an impressive track record of raising its annual dividend since 2017. So, itâs possible that investors could make even more passive income.

Risks

There was plenty to like in Tescoâs recent half-year results. Notably, group sales increased by 5.1% to Â£33.1bn. Free cash flow also increased 2.9% to Â£1.3bn.

However, I also see some concerns arising from its results. Group operating profit only increased by 1.5%, less than sales. This suggests margins are being squeezed by a combination of higher inflation and cost-of-living pressures.

If these issues persist, I think the UKâs largest supermarket could face even more problems with its margins. In this scenario, it might be forced to raise its prices. Consumers could turn to cheaper alternatives like Aldi and Lidl as a result, which could reduce Tescoâs market share.

Moreover, net debt has climbed by 3.8% to Â£9.9bn, which I believe investors should be cautious of.

Prediction

As free cash flow is growing, I believe that Tesco is in a decent position to continue raising its dividend.

Furthermore, there may be some scope for a share price increase as its P/E isnât that high.

However, investors must remember that the companyâs shares have had three strong years. They have grown 17.1% so far this year, 50.1% since the start of 2024, and 94.5% since the start of 2023.

While this can be justified with its earnings growing from Â£737m in FY23 to Â£1.6bn in FY25, I think cost-of-living pressures and inflation will persist until next Christmas at least. This could create issues for its margins and earnings growth.

Ultimately, I think its shares will remain near their current position and may see a modest share price increase of about 5% in an optimistic scenario.

Therefore, a Â£5,000 investment could turn into Â£5,250 by next Christmas (plus the dividends). Thatâs why I think investors should consider potentially looking elsewhere to fund next yearâs Christmas.

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Muhammad Cheema has no position in any of the shares mentioned. The Motley Fool UK has recommended J Sainsbury Plc and Tesco Plc. 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.