Is this FTSE 100 stock one to buy in September?

Jabran Khan details this FTSE 100 supermarket stock and decides whether he would add shares to his portfolio in September.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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.

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.

Jabran Khan has no position in any shares mentioned. The Motley Fool UK has recommended Tesco. 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.

More on Investing Articles

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 UK dividend stocks with yields over 10%

These dividend stocks are the highest yielders on the UK market, says Roland Head. But how safe are these generous…

Read more »

Couple relaxing on a beach in front of a sunset
Investing Articles

I’d start buying shares for passive income with this pair

Our writer is looking to earn passive income via investing, and here are two leading stocks he might buy.

Read more »

Tanker coming in to dock in calm waters and a clear sunset
Investing Articles

Here’s the Shell dividend forecast through to 2024

The Shell dividend is still nearly 50% below 2019 levels. Will the oil giant use record profits to rebuild its…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

3 FTSE 100 stocks I think Warren Buffett might love!

Warren Buffett made his fortune thanks to the success of US shares. But here are three FTSE 100 stocks I…

Read more »

Bearded man writing on notepad in front of computer
Investing Articles

Down 75%, has the Deliveroo share price bottomed?

The last 12 months have been torrid for the Deliveroo share price. But does this open an opportunity to grab…

Read more »

Smartly dressed middle-aged black gentleman working at his desk
Investing Articles

Is now FINALLY the time to buy Lloyds shares?

Lloyds shares have leapt in value as market confidence has improved. Should I buy the FTSE 100 bank before it…

Read more »

Black woman using loudspeaker to be heard
Investing Articles

3 high-dividend FTSE 250 stocks to buy right now!

The London Stock Market is packed with top high-dividend stocks to buy. Here are a handful I'm considering buying, despite…

Read more »

Woman using laptop and working from home
Investing Articles

How I’m using my Stocks and Shares ISA to generate lifelong passive income

I’m looking to build a portfolio of assets that will pay me an income in my retirement. Here’s how I’m…

Read more »