2 weeks ago I called Tesco shares an unmissable buy. Then this happened

Harvey Jones was convinced that Tesco shares were nicely placed to continue their strong run, but subsequent events have changed his mind. Now he’s worried.

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Until a few days ago, I thought Tesco (LSE: TSCO) shares were the best thing since sliced bread. They’d smashed the FTSE 100 to grow 70% in just two years, and paid dividend income of around 4% a year on top.

Tesco had defended its perch as the UK’s most popular grocer, with its market share climbing above 28% for the first time since 2015, according to Kantar. That’s way ahead of second-placed Sainsbury’s on 15.2%. German budget chains Aldi and Lidl have made stunning progress, but can’t topple Tesco.

On 24 October, I praised Tesco’s “magnificent turnaround since the dark days of CEO Philip Clarke”. It began when Dave Lewis took over in 2014 and continued after Ken Murphy stepped up four years ago.

Is this FTSE 100 stock about to struggle?

I was optimistic about the future too. Inflation had dropped to 1.7% in September and Goldman Sachs said interest rates could slump as low as 2.75% in 2025. Consumers would have more cash in their pockets as a result. Lower inflation would cut Tesco’s input costs too.

I was further buoyed by a 4% increase in first-half sales (excluding fuel) to £31.5bn, with underlying retail operating profit up 10% to £1.6bn. Higher staff pay was offset by cost-cutting and productivity improvements.

I was all ready to buy Tesco when I had the cash but then something changed. It’s taken a few days for the impact to sink in.

In her Budget on 30 October, Labour chancellor Rachel Reeves hiked employers’ National Insurance levy to 15% and lowered the point at which they pay it. This is expected to cost UK businesses £25bn a year from April.

Tesco is the UK’s second biggest employer after Compass Group, with 330,000 on the payroll. The NI hike will cost it £250m a year, according to Morgan Stanley. Over the term of the Parliament, this will add up to £1bn.

Group profits are forecast to hit £2.9bn this year, so this isn’t the end of the world. But Tesco already operates with wafer thin operating margins of 4.1%. These will now be squeezed.

Profit growth will be tough in 2025

Tesco will pass some of the cost on to customers, but that’s not ideal either, given the competitive UK grocery sector. It daren’t go too far or it will risk losing market share. Customers won’t be feeling flush either, with Bank of England governor Andrew Bailey warning the Budget will push up prices, cut jobs and squeeze pay.

The other supermarkets are in the same boat. Sainsbury’s is the UK third biggest employer, for example. So Tesco is likely to retain its relative edge. Its shares are still bouncing along, up 24.17% in the last 12 months.

Yet I’m worried they may struggle as the NI hike and inflation issue get to work. If the Tesco share price dips, I’ll swoop. But not today.

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.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Compass Group Plc and 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.

More on Investing Articles

Investing Articles

10%+ yields! Here’s the dividend forecast for M&G shares to 2026

Only Phoenix Group offers a larger forward dividend yield than M&G shares. Does this make the FTSE 100 firm a…

Read more »

Investing Articles

With a P/E ratio of 9, is the Aviva share price a bargain?

Christopher Ruane looks at the Aviva share price and considers some strengths and weaknesses of the FTSE 100 insurance business.

Read more »

Surprised Black girl holding teddy bear toy on Christmas
US Stock

Is it too late to buy growth stock Shopify after its 25% pop?

Up more than 40% this year, Shopify is on fire at the moment. Here, Edward Sheldon explains how he’d play…

Read more »

Investing Articles

Investors should consider buying this energy AIM stock, up 50% in the past year

AIM stock Afentra has seen a stellar price rise in 12 months to November. I believe there may be room…

Read more »

Investing Articles

2 ISA shares to consider for a large passive income!

Looking for dividend shares to buy in a Stocks and Shares ISA or Lifetime ISA? Royston Wild reveals two of…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

A Bitcoin investment that can be held inside a Stocks and Shares ISA or SIPP

UK investors can’t buy Bitcoin ETFs for their investment accounts or SIPPs due to FCA regulation. This stock could be…

Read more »

Entrepreneur on the phone.
Investing Articles

As the Vodafone share price slides 6% on lacklustre H1 results, what does the future hold?

After posting moderate results this morning, Vodafone saw its share price sink further, erasing this year's gains. Our writer looks…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing For Beginners

If I’d invested £5k in a FTSE tracker fund after the pandemic crash, here’s what I’d have now

Jon Smith explains the extent of his potential gains if he'd invested in a FTSE tracker fund during the Covid…

Read more »