Ah, Tesco (LSE:TSCO). The supermarket giant that’s as British as a cup of tea on a rainy day. But is this retail giant still a tasty morsel for my portfolio, or has it passed its sell-by date? Let’s roll up our sleeves and dig into the company and the Tesco share price to see what we can find.
A giant of the sector
Tesco is everywhere in the UK. With a 27% market share, it’s the undisputed heavyweight champion of UK groceries. With over 100 years in operation, it’s been through more or less everything, from wars to pandemics. It’s built an impressive track record, despite issues like the overstated accounts scandal in the last decade.
But management isn’t resting on its laurels. It’s been flexing its digital muscles too. With a massive 40% of the UK’s online grocery market, the firm’s delivering more than just groceries – it’s delivering results. It’s as if it has found the secret aisle where it keeps the extra profits.
And its latest party trick is the new marketplace business. Tesco’s aiming to be the one-stop-shop for, well, everything. Need a banana, a birthday card and a bicycle? It’s got us covered.
Now, for the dividend devotees out there, the shares are serving up a mildly tempting 3.4% yield. It’s not quite a three-course meal, but it’s certainly more than a mere snack for income-hungry investors.
Sector challenges
But hold your horses (or should I say, hold your shopping trolleys?). It’s not all rosy in the aisles. The UK grocery market’s as crowded as the checkout lines on a Saturday morning. Discount rivals Aldi and Lidl are nipping at revenues like a pair of hungry terriers, and their expansion is accelerating.
And let’s face it, the UK economy isn’t exactly a picture of sunshine and rainbows right now. With consumers keeping a tighter grip on their wallets than a toddler with a chocolate bar, Tesco might find its profit margins squeezed.
Oh, and we can’t ignore the elephant in the room. With debts of £14.8bn, and a debt-to-equity ratio of 61.9% in an era of high interest rates, investors wouldn’t be blamed for having a few concerns.
One to watch
Tesco’s without doubt a giant of the sector with a long future ahead of it, but with the sector facing a number of challenges, the next few years clearly have some uncertainty.
On one hand, it’s clearly the big cheese of UK supermarkets. It’s got the kind of market dominance that makes other retailers green with envy. Its online game’s strong, and it’s not afraid to try new things. Plus, that dividend’s looking pretty tasty.
On the other hand, the competition’s fierce, the economy’s wobblier than a jelly in an earthquake, and that debt isn’t going to pay itself off.
So for the long-term investor who can stomach a bit of volatility, I like the idea of watching Tesco to see what’s next. It’s got the brand power, management experience and the adaptability to weather most storms, so I’ll be adding it to my watchlist for now.
This post was originally published on Motley Fool
