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£10,000 invested in Tesco (LSE:TSCO) shares three months ago would now be worth £10,390. The stock is up 3.9%, which most investors would probably be grateful for given the volatility during the period.
But what about now? Should investors still consider Tesco?
Marching forward
For the financial year just passed, Tesco reported group sales (excluding VAT and fuel) of £63.6bn, up 4% at constant rates, and group adjusted operating profit rose 10.9% to £3.1bn. The retailer’s adjusted diluted earnings per share surged 17% to 27.4p, and the dividend per share was increased by 13.2% to 13.7p.
Notably, Tesco’s UK market share climbed to 28.3% — its highest in nearly a decade — reflecting 21 consecutive periods of share gains. This success is attributed to Tesco’s focus on value, quality, and availability, as well as continued investments in product innovation and digital expansion.
Still good value?
I think Tesco’s valuation remains reasonable relative to peers and its own history. The forward price-to-earnings (P/E) ratio is forecast to decline from 15.9 times in 2025 to 14.8 times in 2026 and 13.6 times in 2027, suggesting improving value as earnings grow. The P/E ratio ends the forecasting period at 12.8 times in 2028.
Meanwhile, Tesco’s dividend outlook remains attractive. The 2025 dividend is forecast at 13.4p per share, with further increases to 14.6p in 2026 and 15.7p in 2027, translating to forward yields of 3.6%, 3.9%, and 4.2% respectively.
The payout ratio is expected to stabilise around 50%. This tells us that Tesco’s dividends are well-covered by earnings, providing reassurance on sustainability even if earnings growth slows.
In addition, Tesco has announced a new £1.5bn share buyback programme to be completed by April 2026, funded by free cash flow and proceeds from the sale of its banking operations.
The balance sheet
Net debt fell 2.4% to £9.5bn at the end of February 2025. This led to a net-debt-to-EBITDA (earnings before interest, tax, depreciation, and amortisation) ratio of around two times. This a level generally considered safe for a retailer of Tesco’s scale.
However, Tesco faces rising cost pressures, including higher wages, national insurance contributions, and input prices. It plans to offset these with £500m in new cost savings, building on £510m achieved in the prior year.
The company has also warned of lower profits in 2025/26, with guidance for group adjusted operating profit between £2.7bn and £3bn, reflecting the intensifying price competition from rivals like Asda and the discounters. This may not be reflected yet in the forecasts above.
Net debt could rise to around £11.2bn in 2026 according to the forecasts.
The bottom line
Despite the near-term caution, Tesco’s scale, operational efficiency, and strong balance sheet position it well to weather industry challenges. It’s also more aspirational than some other grocers, and this may benefit the company over the long run.
For investors seeking a blend of income, resilience, and modest growth, Tesco shares are certainly worthy of consideration. The consensus forecast suggests a positive long-term trajectory although some analysts may need to factor in Tesco’s most recent guidance.
Personally, I’m not sure the stock is right for my portfolio now. But it’s a stock I’ll continue to assess from time to time.
