The Tesco (LSE: TSCO) share price dipped 4.4% yesterday (17 March), making it the FTSE 100′s biggest daily loser. This means the supermarket stock has now fallen around 18% in just one month!
Zooming further out though, the share price is still up 13% over one year and 32% over two. The dividend payouts have been ticking up nicely too.
Might this recent volatility be a dip-buying opportunity to consider for income investors? Let’s check out what’s been going on.
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Price war fears
The sell-off in Tesco shares in recent days relates to developments at rival Asda. After years of falling sales and market share, the supermarket is ready to fight back with price cuts. And Asda’s management says it has “a pretty significant war chest” to do it with.
The old ‘Rollback’ advertising campaign recently made a comeback, with Chairman Allan Leighton saying Asda aims to be 5%-10% cheaper than its rivals. It’s ready and willing to take a hit on profits to claw back customers.
This has stoked fears of a price war among the major supermarkets. As a result, the Sainsbury’s and Marks and Spencer share prices are down 11.4% and 10.5%, respectively, in the past month.
The risk for Tesco shareholders is lower future profits if the firm also cuts prices to stay competitive. It already operates on thin margins (around 4.5%).
Meanwhile, costs are rising, with the company’s National Insurance bill set to rise by an extra £1bn over the course of the next four years.
Inflation also remains stubborn, adding to the uncertainty, and there’s UK economic stagnation. Cash-strapped shoppers might start tightening their belts again this year.
Valuation
Despite all this, the stock now looks decent value to me. For Tesco’s 2025/26 financial year, which started last month, the price-to-earnings (P/E) ratio is around 11.
That’s a tad more than Sainsbury’s (9.4) and Marks and Spencer (10.3), but Tesco is the undisputed leader with market share above 28%. In my eyes, the stock isn’t overpriced.
Moreover, the forward dividend yield is 4.5%, above the FTSE 100 average and well covered by earnings. Payouts aren’t guaranteed though, as some investors will remember from the accounting scandal that shredded both the share price and dividend around a decade ago.
However, Tesco has done well to rebuild trust, and its grocery market share recently hit a seven-year high. Speaking personally, I won’t be tempted to switch to Asda, as I’m kept loyal by the powerful Clubcard programme.
Worth a look
I’ve been impressed by Tesco’s market share gains and how it managed to navigate the cost-of-living crisis following Covid. Notably, newer entrants to the UK grocery scene like Amazon, Ocado and Hellofresh haven’t come close to luring away Tesco’s customers.
Last April, Tesco committed to buying back an additional £1bn worth of shares by next month. This means that it will have bought back £2.8bn worth of shares since the start of the programme in late 2021.
In the near term, there could be a bit of pressure on the share price as investors monitor the potential competitive risks. Over the long run though, I think the stock will bounce back and is worth considering for income growth investors.
