Tesco (LSE: TSCO) has done well during the Covid-19 pandemic. It offers a delivery service that’s as good as any, and that has been a lifeline for millions stuck at home. The Tesco share price has held up strongly, and that reinforces my liking for the company.
I’ve come close to buying Tesco for my Stocks and Shares ISA a number of times. The shares tend to hover around a reasonable valuation. And then there’s the dividend. Yields are strong now at around 4%, and Tesco’s progressive policy should bode well for the future.
Supermarket shares are currently buoyed by the bidding battle we saw for Morrisons. There’s plenty of private equity capital around, it seems, ready to be invested in the UK supermarket sector. The Sainsbury share price has already spiked amid rumours that it could be the next target. That’s come to nothing yet, and the shares have fallen back.
Tesco share price boosted?
I reckon the chance of anyone making a bid for Tesco is slim. But the Morrisons takeover does suggest supermarket shares are undervalued. So I’m back to thinking about Tesco for my next chunk of investment cash.
I haven’t bought Tesco only because, whenever I’m ready for a purchase, I find something I like better. One thing did make me wary of Tesco back in the pre-pandemic days, though. That’s competitive pressure from the cut-price duo of Lidl and Aldi.
We’re heading out of the crisis now, and away from a forced need to order our shopping for home delivery. So are the old pressures coming back? And will the Tesco share price face a weaker October and beyond? Both from fading bid speculation and from the two interlopers?
Expansion is back on
Expansion plans were put on hold when the lockdown days hit. But they’re getting back on track now. In June, Lidl revealed plans to open 50 new stores in the UK over the subsequent 12 months. The plans will cost an estimated £1.3bn, and should help the German operator to reach its goal of 1,000 stores by 2022.
Interestingly, Lidl plans to install electric vehicle charging points at all its new stores. Will that give them an added attraction over Tesco stores?
Aldi, meanwhile, has announced plans to invest a similar £1.3bn in its store expansion programme. This time, we’re looking at 100 new stores over the next two years. There might be a bit of an edge here too, as Aldi reckons it won’t be suffering from supply chain shortages as it directly employs most of its own drivers.
What do I think now?
So what’s my take on Tesco now? I do think I need to have a keen awareness of the growing competition. But it’s more a case of remembering what the underlying market is like, as I might otherwise forget that Tesco’s pandemic advantages will not be permanent.
Kantar Worldpanel still puts Tesco’s market share at 27.3%, with the German duo accounting for 14.2% between them. I want to keep a close eye on where those figures go in the coming years. But I still see Tesco as having its advantages, though I do think the Tesco share price could show a bit of a wobble in October. It remains on my shortlist.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Morrisons and 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.
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