Should I buy Tesco shares as takeover talk heats up?

The Tesco share price has risen strongly as M&A talk has grown. Should I buy the FTSE 100 share as the fight over Morrisons intensifies?

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Takeover action over at Morrisons has boosted investor appetite for some of the FTSE 100’s other grocery giants too. The Tesco (LSE: TSCO) share price, for example, has just hit three-month highs above 236p per share on talk it could also become a target. It’s possible that Britain’s biggest retailer could continue to soar as the bidding war intensifies too.

Despite these recent gains though, the Tesco share price still looks mighty cheap on paper. City analysts think the UK retail share will enjoy a 145% rise in annual earnings during the 12 months to February 2022. A subsequent forward price-to-earnings growth (PEG) ratio of 0.1 sits well inside the widely-regarded bargain benchmark of 1.

At current prices, Tesco also carries a gigantic dividend yield a shade below 4.5%. This smashes the broader forward average for UK shares by a full percentage point. So, is now the time to buy this FTSE 100 firm for my own shares portfolio?

Looking on the bright side

It’s certainly possible the Tesco share price could continue rising strongly. Factors driving it could include:

#1: Investment in e-commerce keeps going. 2020’s public health emergency prompted all the UK’s major supermarkets to significantly improve their online propositions. Tesco solidified its position at the top of the tree last year by taking on 16,000 new workers to turbocharge its online capacity. And the company plans to keep spending to capitalise fully on the huge growth that online grocery looks set to experience. Its plans include opening 25 new fulfilment centres over the next three years.

#2: A Tesco takeover emerges. As I said, speculation that Tesco could also become a takeover target has helped lift the firm’s share price. Now it’s true that the company’s market-cap is almost three times that of Morrisons, at £17.9bn. But that doesn’t rule out the possibility of a buyer swooping in. Amazon, for example, has more than enough financial clout to buy up Britain’s biggest supermarket. What’s more, the company has a track record of making big statements as it aggressively builds its position in the grocery industry. Don’t forget Amazon’s takeover of Whole Foods several years back.

An Amazon Go Grocery storefront

Dangers to Tesco’s share price

All that said, I’ve some reservations about buying Tesco shares today. These centre around the worsening competitive pressures it faces as Amazon — along with budget outlets such as Aldi and Lidl, and premium chains such as Waitrose — all vie for the retailer’s customers.

At one time, £1 out of every £6 found its way into Tesco’s tills. But the ambitious store expansion programmes of its rivals has shaved a big lump off the FTSE 100 firm’s market share. Not only are these schemes set to continue, but it seems like the fight online is about to get a hell of a lot bloodier too.

The dangers to Tesco’s crumbling customer base look set to keep growing, as does the pressure on its wafer-thin margins as discounting across the industry ramps up.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Royston Wild has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Morrisons and Tesco and has recommended the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. 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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