The tills tend to ring busily at this time of year for supermarkets such as Tesco (LSE: TSCO). But might it make sense for me to consider Tesco shares?
Up by almost a fifth
So far, 2025 has been good for Tesco shareholders.
The Tesco share price is up by 19% since the turn of the year. That means that £3k invested back then would now be worth around £3,570.
That is a slightly better performance than the flagship FTSE 100 index, of which Tesco is a member. It has moved up by 17% since the start of January.
On top of that, Tesco pays dividends. Currently the yield is 3.2%, just above the FTSE 100 average.
But someone who bought at the cheaper price back in January would currently be getting close to 4%.
Could things get even better?
This year’s share performance reflects the ongoing strength of Tesco’s business.
It has a leading role in the UK grocery market, giving it economies of scale. With a strong brand name, massive customer base and powerful loyalty programme, the company has a proven business model that I think could potentially keep doing well for decades.
Still, this is a tough market. Grocery retail tends to have low profit margins at the best of times.
The UK is a highly competitive market and a host of other retailers continue to put pressure on the wider market. This year, for example, we have seen Asda emphasise its pricing in trying to win back customers.
So, while Tesco could continue to grow, I do have some concerns about profitability levels in such a competitive market. In the first half of this year, for example, Tesco’s pre-tax profit margin was under 4%.
The valuation doesn’t look too attractive
Given that, what am I to make of the ongoing rise in the Tesco share price? It is up 57% over the past five years – and has more than doubled since October 2022.
In fact, this year has seen Tesco shares hit their highest price for well over a decade.
Currently, the price-to-earnings (P/E) ratio is 20. That is not out of sync with peers: J Sainsbury currently trades on a much higher P/E ratio.
Perhaps the economic uncertainties of this year have pushed some investors towards defensive sectors of the economy, including grocery retail.
However, that valuation looks a bit racy for my tastes.
How might I hope to make money over the long term from investing? The dividend yield is attractive. But with what I regard as a full share price, I see no obvious reason to expect long-term share price growth.
It could come, of course: this year has shown that Tesco shares can perform well even when the business does just solidly, not brilliantly. But I see more compelling growth stories elsewhere, alongside more attractive valuation.
So I will not be adding Tesco shares to my shopping basket this December!
