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The Tesco (LSE: TSCO) share price has taken me by surprise. I thought this FTSE 100 blue-chip might turn out to be a bit of a plodder. How wrong I was.
The grocery chain’s a massive operation with around £70bn turnover, and tight profit margins of roughly 3.5%. It carries huge fixed costs including a nationwide chain of stores, more than 300,000 staff, and a complex logistics network. Add in fierce competition from German discounters Aldi and Lidl, and the challenge seems enormous.
Brilliant FTSE 100 stock
Yet over the past five years, Tesco’s taken on all-comers and beaten them. Latest WorldPanel data shows its market share is 28.3%, well ahead of second-placed Sainsbury’s at 15.3%, with Asda at 11.8% and Aldi at 10.6%.
Tesco’s share price has responded, climbing 35% over the past year and 125% over five, with dividends on top. Clearly, I misread this one.
Looking at that success, I’m now wondering how far it can go. Its valuation is starting to feel full-priced, with a price-to-earnings ratio of 16.6. With high expectations baked in, any stumble in growth or profits could be punished.
Dividend income and growth
Tesco’s scale cuts both ways. As the UK’s biggest employer, it was hit by April’s hike to employer’s National Insurance and 6.7% increase in the Minimum Wage. Competition remains intense as Asda slashes prices and profits to win lost share. Tesco’s also warned that adjusted operating profit in 2025/26 could fall. That’s a lot to manage for a business already at scale.
I wondered if I was too sceptical, given my previous doubts, so asked ChatGPT whether Tesco shares might have gone stale. It was upbeat about the business, highlighting Tesco’s strong market share: “Consumers are still choosing it over rivals, pricing power appears intact, and scale works in its favour”.
I pressed the chatbot further on risks and it warned: “Tesco doesn’t have unlimited strength to absorb cost inflation, margin contraction or aggressive pricing from rivals without performance taking a hit”.
AI insight and reality
The bot added: “Tesco still has strengths and merits, but the ride is less smooth and the valuation is less forgiving than when the shares first raced ahead”.
That’s all fair, but very generic. Also, ChatGPT’s a people pleaser. It often reflects what users want to hear, and its answers were partly echoing my own scepticism. So I’ll treat them with extreme caution.
My own sense is that the low-hanging fruit may already have been picked. The combination of full valuation and modest dividend yield makes the shares less attractive than in past years.
Broker forecasts confirm the scepticism. Twelve analysts offering one-year price forecasts produce a median target of just under 472p. That’s only 3.75% above current levels.
Long-term perspective
Tesco may have passed its best-before date, but I wouldn’t say the stock has hit its sell-by date. It still deserves consideration as part of a balanced portfolio, for long-term investors. That’s my view. ChatGPT seems to reflect it, but other investors might find the chabot draws very different conclusions, as it aims to please them instead. Ultimately, investors need to do their own research, and take their own view.