FTSE 100 incumbent Tesco (LSE:TSCO) has represented a safe investment in the past in my opinion. At current levels and with the supermarket sector changing, should I buy shares for my portfolio in September?
FTSE 100 stalwart
As the UK’s largest retailer, Tesco possesses the financial power and knowledge to continue being the biggest fish in the large pond that is the grocery sector. To supplement its position, it added wholesaler Booker a few years ago. I think this acquisition will further enhance its offering because, in my opinion, reopening will mean the hospitality sector will boost sales and profits.
As I write, shares in Tesco are trading for 241p per share. At this point last year, shares were trading for 228p per share. This equates to a 5% increase in its share price in the past 12 months.
On paper, I believe the Tesco share price is cheap. Tesco currently trades on a forward price-to-earnings growth ratio of 0.1. A general consensus of this figure is that any figure below 1 suggests a stock is potentially undervalued. It also offers a dividend yield of 4%. This is 1% higher than the broader FTSE 100 figure. Analysts predict that annual earnings to February 2022 will increase substantially by over 140%.
Performance and risks
I understand that future performance cannot be predicted by an historic track record. When doing my due diligence for my portfolio, I do like to use it as a gauge. Prior to the pandemic, Tesco’s revenue was over £63bn for 2018 and 2019. For 2020 and 2021 it has been £57bn and £58bn, respectively. The pandemic will not have helped its revenue but Tesco also sold off its Asian business to focus on other markets. Tesco’s profits followed a similar trend to that of its revenue across the past four years or so too.
Despite Tesco being a FTSE 100 stalwart and good dividend payer with the propensity for acquisitions, I do have concerns. My first concern is the increasing competition in the groceries and supermarket sector. The rise of budget firms like Aldi and Lidl has seen the big four supermarkets lose substantial market share. Furthermore, Amazon has ramped up its presence in the grocery sector.
In times of economic uncertainty, such as when the pandemic began, consumers are looking for more bang for their buck. In addition, margins are getting tighter and tighter which means there is less profit to be made and more of it has to be shared across many players.
Finally, the logistics and haulage issues in the UK with a shortage of lorry drivers and demand outstripping supply of such services will impact Tesco. There is even talk of the army being drafted in to help restock shelves.
My verdict
Tesco is too much of a risky proposition for my portfolio right now. Despite it looking cheap on paper, I have too many concerns around competition and increasing pressure on margins. This could well affect profitability as well as dividends. I think for September, I would rather look at other FTSE 100 options.
