Could this FTSE 100 stalwart turn my Stocks and Shares ISA into a passive income machine?

Tesco has been a resilient part of the FTSE 100 since 1996. But should Stephen Wright look to make it part of his Stocks and Shares ISA in 2025?

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Image source: Tesco plc

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Despite being founded before anyone can remember, Tesco (LSE:TSCO) continues to dominate the UK grocery market. And I’m wondering whether I should add it to my Stocks and Shares ISA. 

A 3.5% dividend yield is above what I’m currently getting from my portfolio. Furthermore, the firm has just reported an impressive Christmas trading period, giving investors plenty to be positive about.

Dividends

Genuine customer loyalty in the supermarket industry is about as realistic as a world where everyone agrees on something. And this makes the emergence of Aldi and Lidl a risk for Tesco shareholders.

Should you invest £1,000 in Tesco right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Tesco made the list?

See the 6 stocks

It’s worth noting, though, that the UK’s largest supermarket company has been defending its territory very well. According to data from Kantar, Tesco’s market share in the last quarter of 2024 was 28.5%. 

That’s up from 27.7% the year before. And with the market as a whole expanding as Brits spent more on Christmas groceries than ever before, investors have a lot to feel positive about.

Importantly, Tesco also has some long-term advantages that make it difficult to compete with. Most obviously, its scale puts it in a powerful position when it comes to negotiating prices with suppliers.

In a world where retailers across the board are being forced to compete on price, having lower costs than the competition is a huge advantage. And it’s hard for other supermarkets to replicate this. 

In other words, while barriers to entry might be low, barriers to scale are high. And it’s the size of Tesco’s operation that makes its market position harder to shift than a rusted-out tank.

Growth

Tesco’s strong competitive position makes it look like a great passive income investment. But I’m a bit wary – when I’m looking for stocks to buy, dividends aren’t the only thing I think about.

I also pay close attention to a company’s future growth prospects. Specifically, I’m interested in what opportunities a business has to reinvest its profits to increase its income in the future. 

This comes down to two things. The first is how much Tesco is going to be able to increase its revenues and profits by and the second is how much it’s going to have to invest in order to do that.

In terms of revenue growth, the last 10 years have been about as explosive as a walking tour of a library. Leaving aside the Covid-19 pandemic, sales have generally increased by more than the rate of inflation – but not by much. 

Tesco revenue growth 2015-2024


Created at TradingView

It’s also worth noting that this growth has been fairly expensive. Over the last decade, Tesco’s return on invested capital (ROIC) has consistently been below 10%, which isn’t particularly impressive.

Tesco ROIC 2014-2024


Created at TradingView

This indicates that the company has to commit quite a lot of its capital into things like inventory and equipment to achieve this growth. And this isn’t a particularly good sign for investors.

An opportunity?

Tesco has been part of the FTSE 100 since 1996 and its scale gives it a big advantage over the rest of the UK grocery industry. From a dividend perspective, I think the stock looks attractive. 

The thing is, there’s more to investing than just dividends. And with growth looking both modest and capital-intensive, I think I can find better opportunities right now.

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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 assessed. Consider taking independent financial advice.

Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended 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.

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