Investors in Tesco (LSE: TSCO) shares have nothing to complain about. No taking them back to the shop, they’ve been a terrific buy.
The FTSE 100 company is a solid, established blue-chip, offering solid growth prospects and steady dividend income. Investors don’t expect fireworks, yet lately they’ve got them. The Tesco share price has soared 97% over three years and continued the momentum in 2025, up almost 20%.
Even more impressively, it did this at a time when the grocery sector was under the cosh. Inflation and the cost-of-living crisis drove up Tesco’s input costs, which it had to pass on to consumers who were already feeling the squeeze. Post-pandemic supply chain challenges lingered, while German arrivistes Aldi and Lidl continue to snap at its heels.
FTSE 100 surprise package
The big supermarkets also had to swallow a large hike to their National Insurance contributions in April, and an inflation-busting increase to the minimum wage. Tesco employs more than 300,000 people. The extra tax bill will total £1bn over four years. Plus there’s another supermarket price war going on, this one started by struggling Asda.
There have been some positives, with wages finally rising, allowing people to spend a bit more. As the UK’s biggest grocer, with a market share of just over 28%, Tesco has pricing power. More than 20 million households hold the Tesco ClubCard.
Tesco has recovered brilliantly since losing its way under Philip Clarke, who departed in 2014, with current CEO Ken Murphy building on the work done by turnaround specialist Dave Lewis.
Yet lately, I’ve been wary. With the price-to-earnings ratio nudging 16, the catch-up process is surely over. Surely Tesco shares can’t keep growing at this speed?
This stock has slipped
Now there’s been a hiccup. Over the last three months, Tesco shares have fallen 2.25%. That would have reduced a £10,000 investment to £9,775. Of course, shares go up and down all the time, and that’s not exactly a big dip, but it does reflect my concerns. And I’m not the only one who thinks Tesco has to slow from here.
In December, broker Jefferies downgraded it from Hold to Buy. It did lift its price target by 10p to 450p, but that failed to ignite excitement. Today, Tesco shares trade at 443p. The broker spotted a mismatch between optimistic like-for-like sales forecasts and today’s “more muted spending environment”.
Consensus forecasts are more optimistic, producing a one-year price forecast of 482p, 9.02% higher than today. With a forecast yield of 3.24% in 2026, that’s a total return of 12.26%, which would turn a £10,000 investment into £11,226. That’s not bad. Just not as good as before.
As the incumbent, Tesco is under constant pressure from hungry rivals. Its profit margins are already pared to the bone at 3.9%, while it has less room for growth after pulling back on overseas operations.
The shares, with a long-term view, still look good to go. But investors might wait for a lower entry point before they consider buying them today.
