Key rival Sainsbury’s was similarly impacted, but to a lesser degree. Meanwhile, more diversified retailers including Marks and Spencer, JD Sports and Kingfisher made moderate gains.

This is likely the result of short-term sector weakness, but it’s worth reassessing Tesco’s long-term appeal as a defensive income play. Over the past few years, the share price has steadily grown from around 10 to 15 times earnings. Its forward price-to-earnings (P/E) ratio is now estimated to be above 15 — the highest among UK retail stocks.

That begs the question: does it still have appeal as a defensive income play, or is it moving into ‘value trap’ territory? Let’s take a look.

Consumer confidence weakens

This week’s dip looks more like a patch of sector weakness than a big change in Tesco’s story. British retail sales rose 0.7% in March, and Worldpanel said UK grocery inflation eased to 3.8% in late April, with no clear early hit from Middle East tensions.

That said, the backdrop isn’t perfect. Consumer confidence has slipped to its lowest level since October 2023, and some UK retailers have reported softer trading in April.

So while Tesco remains resilient, analysts are right to be cautious about assuming smooth growth from here.

Income outlook

Caution aside, I’d say Tesco’s latest numbers still offer a strong argument for considering an investment. The company reported adjusted operating profit of £3.15bn, free cash flow of £1.96bn, and adjusted diluted earnings per share of 29p.

Meanwhile, it hasn’t forgotten its shareholders, maintaining a commitment to dividends and buybacks. For income investors, that’s where the core attraction still lies.

The dividend yield‘s expected to grow steadily from 3% to 3.6% over the next three years, while analysts expect annual payouts to reach about 17p per share by 2028.

However, growth expectations are more moderate. The average 12-month price target is only 513p, implying roughly a 7.39% increase from current levels. That certainly isn’t explosive growth, but it’s respectable enough for a defensive stock.

So while the forward P/E ratio of 15 is no longer cheap, it still looks fair for a market leader with strong cash generation.

My verdict

Aside from a slightly high valuation, another risk is that the market may have already priced in future gains. If grocery inflation cools faster than expected, or if consumer spending weakens, Tesco’s earnings momentum could slow.

Even so, the balance sheet, cash flow, and dividend outlook still give the shares a solid defensive profile. So for UK income investors, I feel it’s still worth considering as part of a diversified portfolio. 

The defensive business model blended with moderate income potential is just that right amount of balance a portfolio needs when markets get shaky.

However, for those chasing fast gains, there may be better options on the FTSE 100. Some I’ve identified recently include BAE Systems, AstraZeneca, and RELX – but I’m always eyeing fresh opportunities.

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No wonder Tesco shares can be a popular option when people are considering not just what groceries to pick, but also what shares might make it into their ISA.

How lucrative (or otherwise) has such an approach been lately?

Up by close to a quarter in just 12 months

Let’s take the past year as an example. During that period, the Tesco share price has increased by 23%.

Now, I think diversification is always important for an investor. It is never a good idea to put all your eggs in one basket. But thanks to having a new ISA contribution allowance open up each April, an investor may be able to put one year’s whole allowance (£20k) into Tesco shares while keeping their ISA healthily diversified, thanks to having invested some or all of their allowance in previous years.

That 23% increase in the Tesco share price over the past year means £20,000 invested in the supermarket back then should now be worth around £24,600.

As Tesco is fond of saying, every little helps – and for most of us, a near-25% gain within a year on one year’s ISA allowance is not just a little!

On top of that capital gain, there are also dividends to consider. At 3.1%, the current Tesco yield is a little above average for the FTSE 100 index. Someone buying at the lower price a year ago would be earning a higher yield though.

That is because dividend yield is a function of the dividend per share (which is typically the same for all of a company’s shares of a certain class) and the price they paid for their shares (which is specific to them).

So £20k invested a year ago ought to be earning roughly £760 in dividends annually.

Anything from Tesco?

That passive income stream sounds good to me – and so does the capital gain. But would Tesco shares be on my shopping list?

For now, the answer is no. I do like the company’s defensive qualities. Its economies of scale, huge customer and loyalty membership base and extensive store network are all strengths I think could help it keep doing well for years or even decades.

But the UK grocery market is brutally competitive, even for the leader. Profit margins are razor thin. They could get thinner yet, as Tesco is squeezed by food and full inflation on one side and consumer belt-tightening on the other due to the conflict in the Middle East.

After the past year’s rise, Tesco’s share price is now 17 times earnings. I do not see that as attractive for a business in a highly competitive industry with low profit margins. So Tesco shares are off my ISA shopping list.

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The stock’s delivered a total return of 35.69% over the past 12 months, turning the average UK monthly take-home pay of £2,934 into around £3,981 in just one year.

The question now becomes, will Tesco shares do it again?

A stellar performance

Tesco’s rally isn’t luck. It’s the product of genuine operational progress while successfully communicating stronger value perception among British consumers.

After years of headwinds, including brutal discounter competition and margin pressure, Tesco’s found genuine momentum.

Management’s October 2025 upgrade to its full-year underlying operating profit guidance of £2.9bn-£3.1bn not only beat analyst expectations but also served as a powerful signal that Tesco had found its stride in the midst of a cost-of-living crisis.

When the results came out last month, management both delivered on its performance promises while simultaneously growing the supermarket’s market share to its highest level in over a decade. That’s despite the continued pressure from discount retailers, revealing the power of Tesco’s Clubcard loyalty scheme.

The timing of this progress also proved to be quite fortunate. With investors and fund managers alike rebalancing their portfolios into more defensive sectors on the back of rising geopolitical uncertainty, Tesco’s strong financial performance has made it a popular favourite in 2026 so far.

So with that in mind, it’s no wonder Tesco shares are on a bull run. But can it continue?

What happens now?

The economic landscape in 2026 is a tricky one. Rising labour costs and Employers’ National Insurance contributions are driving up costs for supermarkets across the country.

At the same time, fertiliser supply chain disruptions in the Middle East is expected to significantly drive up food costs later this year, putting even more pressure on British consumers. This nasty combination of rising expenses and limited ability to pass on costs to customers means Tesco’s margins are likely to get squeezed.

In response to this shifting landscape, management has committed to achieving £500m in annualised savings, in an attempt to offset this pressure through superior efficiency.

Whether or not this strategy will prove successful remains to be seen. But the group’s recent track record does show a pattern of robust execution from leadership. And that’s why the analyst team at UBS has recently reiterated its Buy recommendation with a share price target of 545p.

Compared to where Tesco shares trade today, that implies a potential 12% return over the next 12 months – enough to turn £2,934 into £3,297.

Is Tesco a good investment?

The pressure is definitely mounting for British supermarkets, especially since the already optimised operations of discount retailers like Aldi and Lidl put them in a far stronger starting position to navigate the incoming headwinds.

Nevertheless, Tesco does have some proven defensive traits that make it a potentially compelling stock pick for investors seeking shelter from market volatility. That’s why I think it definitely deserves a closer look.

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But is this long-held belief starting to look more shaky? If fresh data from Which? is to be believed, the robustness of UK supermarket shares is coming under severe pressure.

My view? Tesco’s share price could be set for a painful correction. Here’s why.

What’s happened?

First let’s look at that red flag hoisted by Which? In a chilly retail report, it says that “consumer sentiment was already bad prior to the conflict in the Middle East, but it has fallen sharply in the past two months“.

As a result, its latest survey in mid-April showed “consumer confidence in the future UK economy fell to -62, the lowest level since the height of the cost of living crisis“. Just 9% of respondents think economic conditions will improve over the next year. A whopping 71% believe they’ll worsen.

So what does this mean for food retail? It’s pretty worrying, to put it mildly. Which? says that more than two-thirds of British adults have made “at least one adjustment to shopping or eating habits in the last month“.

These include:

• Buying cheaper products (43% of respondents).
• Buying more supermarket own-brand budget goods (37%).
• Buying extra items on promotion (31%).

Perhaps most alarmingly, Which? says that “15% of UK households reported going without some foods and one in 10 are skipping meals“.

What does it mean?

This is clearly bad news for Tesco, though it may be better placed to tackle this threat than its rivals.

As the UK’s largest supermarket, it has enormous scale and buying power, meaning it can get better prices from suppliers. It also has strong brand power, and a reputation for value that’s helped by promotions through its Clubcard member scheme. Finally, it has an excellent data advantage through Clubcard, enabling it to target promotions more effectively than its competitors.

Yet the threat to Tesco’s sales and margins remains severe. And in the economic current climate, the firm has limited scope to raise prices to protect its already wafer-thin profit margins (just 4.3% last year).

There’s another big worry for Tesco: if customers are cutting back on food essentials, how bad will things get for the retailer’s general merchandise lines? The FTSE 100 firm makes 5%-10% of revenues from non-grocery items.

Will Tesco shares crash?

The longer the Iran war drags on for, the worse these profits threats become. I don’t believe this is baked into the supermarket’s current valuation, leaving it in danger of a correction.

Tesco’s share price has soared 30% over the last 12 months. The result? Its shares trade on a forward price-to-earnings (P/E) ratio of 18.9, well above the 10-year average of 12-13.

Its next trading statement is due on 18 June, and any negative news could send its shares toppling. They could even slump beforehand if news on consumer spending and the broader economy worsens. While it enjoys some protections, I won’t be buying Tesco shares for my portfolio in May.

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It is an extremely impressive outcome for a stock often viewed as a slow‑and‑steady defensive play. But Tesco has benefited from resilient consumer demand, disciplined cost control and the quiet compounding power of its scale‑driven, cash‑rich business model.

The supermarket giant continues to target margin improvements, stronger free‑cash‑flow conversion and ongoing shareholder returns through dividends and buybacks.

So, could investors expect the same sort of returns from here?

Is there any value left in the share price?

It is good to know for the sake of long-term profits that just because a stock has gone up in price, does not mean no value is left in it.

To find out whether there is, I always run a discounted cash flow (DCF) analysis. The model values a business by estimating its future cash flows and discounting them back to the present. The more uncertain those forecasts are, the higher the return investors demand, increasing the discount rate.

Analysts’ DCF valuations vary widely depending on the assumptions used. Under my own assumptions — including an 8% discount rate — Tesco appears 17% undervalued at its current £4.83 price. That implies a fair value of £5.82 — significantly higher than the present price.

If the stock continues to drift toward fair value, this could be a superb buying opportunity if those DCF assumptions hold good.

What about the dividend income?

Tesco’s dividend yield is forecast to rise to 3.2% next year, 3.5% the year after, and 3.9% in 2029.

So, a £20,000 holding now would generate £9,521 of dividends over 10 years and £44,318 after 30 years. The numbers are based on the 3.9% forecast dividend yield as an average, although that can go up and down. It is also based on the payouts being reinvested back into the stock to utilise the supercharging effect of ‘dividend compounding’.

The value of the holding (including the original £20,000 investment) would be £64,318 by the end of 30 years. And that would generate an annual average income of £2,508.

Is this supported by earnings momentum?

Share price and dividend gains are ultimately driven by sustained earnings growth. A risk here for Tesco is the stiff competition in the sector that may squeeze its margins.

Another is any rise in direct or indirect taxation that could force it to raise prices, making it less competitive.

That said, analysts forecast its earnings will rise by a solid average of 6.9% a year over the medium term.

My investment view

My holding in Marks and Spencer means I have sufficient weighting for the retail sector in my portfolio. So I will not be buying Tesco at the moment.

Were it not for this, though, I would do so. It remains the top supermarket in the UK, with good earnings growth forecasts underpinning likely share price and dividend gains. So I think it is worth other investors’ consideration.

My own focus, however, is on bargain stocks with high dividend yields in other sectors.

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They’ve also delivered a steady stream of dividend income on top, boosting the total return. That’s great for existing investors, but it does pose a problem for those considering the FTSE 100 supermarket today. Put simply, have they left it too late? Or can the UK’s favourite grocer continue its strong run?

Should I consider this stock now?

A lucky investor who put £10,000 into Tesco five years ago, when the shares traded around 223p, would have bagged 4,484 shares, ignoring trading charges. If they’d reinvested every dividend along the way, they’d have a fair few more than that today.

Sadly, they won’t get half as many today. After their strong run, Tesco shares now cost around 492p each. An investor with £10,000 would only get 2,033 shares. If they wanted to match that earlier investor and buy 4,484 shares, they’d have to invest a thumping £22,061.

In fact, because they’d have to invest even more to account for those reinvested dividends. Which goes to show just how rewarding equity investing can be. So should investors still consider Tesco at today’s price?

Tesco continues to power on, although lately profit growth has eased. Last week (16 April), it reported a 4.3% rise in full-year retail sales to £66.6bn, with growth across all business divisions and regions. Market share reached its highest level in a decade. Investors reaped the rewards with the dividend increased by 5.8%, to 14.5p per share.

2025 underlying profit came in at £3.2bn, up just 0.6% due to cost inflation. For 2026, Tesco is guiding towards between £3bn and £3.3bn. It’s known for being cautious about these things, but that’s a little disappointing. Hardly surprising though. The Iran war remains a worry. While stock markets have shrugged off the threat so far, that could change at any moment.

Do the risks now outweigh the rewards?

Rising fuel prices will drive up the cost of everything coming from transporting food to keeping the lights on in stores. Tesco typically has wafer-thin margins of around 4%, and those may be squeezed further. It can’t push all its extra costs onto shoppers. They’re also feeling the squeeze, as energy costs, mortgage bills, and unemployment rises. The next year could be tough, although Tesco’s sheer size and sale does offer some advantages, notably when negotiating with suppliers.

Inevitably, the shares aren’t as cheap as they were. The price-to-earnings ratio is now up to 16.5. I still think Tesco is worth considering with a long-term view, but they could be bumpy in the short term. One to buy on a dip maybe? It’s a top UK stock, but right now, I can see other FTSE 100 stocks I’d buy first.

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That’s enough to turn a £5,000 initial investment into as much as £7,080. But with so much growth under its belt, is it too late for new investors to buy shares today? Or could the FTSE stock continue to climb higher from here?

More momentum ahead?

Despite already having a lot of growth under its belt, Tesco shares continued to march higher last week on the back of its latest full-year results. And with the group’s performance exceeding analyst expectations across multiple metrics, it isn’t hard to understand why.

The retailer continues to take even more market share from its rivals, with free cash flow reaching £1,957m. That’s up 11.8% compared to a year ago which, for a mature volume-based business facing rising labour costs, is pretty exceptional.

What’s more, it’s prompted management to upgrade its medium-term guidance to deliver between £1.5bn and £2.0bn in free cash flow each year, up from an original target range of £1.4bn to £1.8bn. And with more excess capital being generated, the prospects for store network expansion, higher dividends, and more aggressive buybacks look quite promising.

In other words, Tesco’s growth story looks far from over. But not everything in these results was hunky dory.

What to watch

While Tesco showed confidence in its medium-term trajectory, the near-term outlook was far more cautious.

In the words of management: “Reflecting the increased uncertainty caused by the conflict in the Middle East, we are providing a wider range of guidance than we were previously planning”.

While free cash flow is on track to match the firm’s new medium-term targets, underlying operating profits look like they could be fairly flat, landing between £3.0bn and £3.3bn for the group’s 2027 fiscal year (ending in February). For reference, in its 2026 fiscal year, underlying operating earnings reached £3,152m.

This also suggests that cost pressures might be starting to catch up with the business. Revenue and cash generation continue to grow at a robust pace, but core earnings are proving more sluggish, both from the previously mentioned headwind of rising costs and price undercutting from its competitors such as Asda.

So where does this leave investors today?

What’s the verdict?

Providing Tesco doesn’t start losing its footing against its increasingly competitive rivals, the group’s free cash flow expansion and market share gains suggest the company remains a high-quality compounder even at a more premium valuation.

The threat of potential margin compression might trigger a bit of profit-taking activity, especially if the geopolitical landscape continues to escalate. However, with impressive operational momentum, such dips may simply create ideal entry points for investors looking to add Tesco shares to their portfolio.

With that in mind, I think this business still has much to offer and is worth deeper investigation.

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The high price comes after half a decade of impressive growth, with the shares climbing almost 110%. Not bad for a supermarket chain that many people consider a ‘steady’ income stock – rather than an exciting growth story.

For context, the last time Tesco was around 500p was in late 2011, back when the grocery sector looked very different. That was before the long grind of deflation, fierce discounting, and weak margins.

So where’s it heading?

Despite the notable milestone, Tesco shares have struggled to hold on to 500p. They’re now hovering around 485p, even after the upbeat preliminary results released last week (16 April).

Full‑year retail sales rose 4.3% to £66.6bn, which is better than I’d expect in a market where shoppers are still sensitive to prices. And free cash flow did even better, jumping 11.8% to about £2bn.

So it’s actually generating more cash than it did a year ago, despite global market wobbles. It also raised its full‑year dividend by 5.8% to 14.5p per share, further establishing its core appeal as an income stalwart. So why’s it struggling to regain 500p?

Conflict uncertainty

The main answer is risk, not results. Tesco has warned that the outlook for fiscal 2026/27 is uncertain, in part because of the Middle East conflict linked to Iran. If oil prices spike, households feel the pinch, and grocery inflation jumps again.

Naturally, that could hit sales and tighten its margins. New guidance points to operating profit of £3bn-£3.3bn and free cash flow of £1.5bn-£2bn. I’d say that’s understandably cautious, all things considered.

But what do major brokers think?

Mixed opinions

Brokers are divided. JP Morgan lifted its target to 500p last week with an Overweight rating, suggesting optimism that Tesco will hold its market share and manage rising costs. Bernstein’s gone further, with an Outperform rating and a 520p target, arguing that the grocer’s scale and brand strength justify a higher valuation.

But not everyone’s bullish. Jefferies sits on a Hold rating with a 430p target, indicating it feels the stock’s now ovevalued after such a strong run. So what does this all mean for investors?

Still a compelling option

For investors, the question is less about where the Tesco share price will go next, and more about whether they’re comfortable with the risk.

The business is undeniably strong, cash‑generating, and dividend‑paying, which makes it a tempting income holding. But the price has already refocused on 2026/27, and the Iran‑related backdrop means it could easily trade sideways (or dip) if oil or inflation increases.

My verdict? Tesco still looks reasonably atractive as a dividend and defensive holding. However, it’s now moved quite far out of ‘value’ territory and may even be overpriced.

If you’re building a long‑term income portfolio, it’s still worth considering. But after a 109% gain in five years, I wouldn’t expect any big moves above 500p in the short term.

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But personally what has most surprised me is how well it has stood up overall so far.

After all, there has been a level of geopolitical uncertainty we have not seen for decades, along with weak consumer sentiment in many markets.

Factors like those sometimes send a market crashing – but we have not seen that happen so far. Maybe it still will, or perhaps it will be years until the next stock market crash. Nobody knows.

But while some investors cower in fear at the mere thought of a crash, the reality is that such a stock market reset can actually be good news for many of us, depending on how we react.

Sorting out the wheat from the chaff

The first thing I think can be positive about a crash is that it helps to provide a harsh reality check on what sort of businesses can still attract investors when the chips are down.

When the market is riding high – as it has been in recent years – some companies attract far bigger valuations than they deserve. Amid the hype, it can sometimes be difficult to know whether a given share is part of this froth, or genuinely doing something new and valuable.

A crash can be a crude pricing tool – many shares may be pushed down below a fair valuation. But in general a crash can do a good job when it comes to providing the harsh truth about massively overvalued businesses.

The dotcom crash was the perfect example of this. Now, as then, some investors have been worrying about whether the market is too frothy — this time around because of AI.

As Warren Buffett says, “you don’t find out who’s been swimming naked until the tide goes out”.

Brilliant companies on sale

Like I said above, a crash can send share prices down including those of perfectly good companies. Sometimes, indeed, it presents an opportunity to buy brilliant companies that have been marked down in price more than their long-term business prospects merit.

Such buying opportunities can be short-lived, so it pays to be prepared. That can involve keeping a watch list of shares one would like to own, if they became available at an attractive price.

A simple example from my own watch list is FTSE 100 retailer Tesco (LSE: TSCO).

Do I think the nation’s leading grocer is an excellent business? Yes. Do I think it merits its current valuation of 22 times earnings? No.

Tesco is a world class retailer. But selling groceries in the UK is a brutally competitive business, with thin profit margins.

Last year, Tesco recorded revenue of £61bn. Its net profit was £1.5bn. That may sound a lot, but as a percentage of the revenue it is around 2.5%.

With competition from the likes of Aldi keeping the pressure on prices, even that profit margin may shrink over time.

At the right price, I could accept that risk. After all, Tesco is profitable, has large economies of scale, and benefits from an enormous customer base.

But the current share price does not offer me a risk/reward ratio that I find attractive. Fortunately, even in today’s market, I do see some bargains elsewhere in the market.

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It wasn’t always like this. In 2014, Tesco was a basket case. Market share, sales, profits, staff morale and customer attitudes were falling as one. Plans for global domination had flopped, with Tesco losing £1.7bn on its ill-fated Fresh and Easy US business. Throw in a £326m accounting shock and a horse meat scandal, and that stands as Tesco’s darkest hour. Then came the dawn.

‘Drastic’ Dave Lewis (now at Diageo) began the turnaround, and from 2020 CEO Ken Murphy has continued the good work. We’ve seen that again this morning (16 April) with yet another set of well-received results.

Top FTSE 100 growth stock

Tesco shares are up around 2.5% this morning after it reported growth across all divisions in the year to 28 February. Initiatives such as its Everyday Low Prices and its Aldi Price Match continue to pull in the punters, while its Clubcard conquers all. Tesco Finest is thriving too.

Group like-for-like sales rose 3.5%, hitting 4.2% in the UK, but wholesale distributor Booker remains sluggish at 0.2%. Group adjusted operating profit climbed 0.6% at constant exchange rates to £3.15bn, beating guidance. Free cash flow rose 11.8% to £1.96bn, boosted by rising sales and disciplined working capital management.

However, the board was cautious about the year ahead, warning of the impact of the conflict with Iran. Guidance suggests underlying operating profits of between £3bn and £3.3bn. Much depends on how long the war lasts and the impact on oil prices, supply chains, inflation, unemployment and the like.

While that’s completely out of the grocery giant’s hands, Tesco is better placed to withstand the downturn, because of its market strength, strong supplier relationships and pricing power. The board has also worked hard to cut costs, helping to offset the impact of higher employer’s National Insurance and two big minimum wage increases.

And there’s income too

As well as growth, Tesco has delivered dividends. The trailing yield has slid to just 2.87%, as a direct consequence of that share price surge. Recent policy has been progressive, with the board hiking shareholder payouts by 11% in 2024, 13.2% in 2025 and 5.84% in 2026. The yield is forecast to hit 3.06% in 2026, then climb again to 3.36% in 2027.

Tesco shares are getting a little expensive, with the price-to-earnings ratio climbing to just over 17. That’s higher than rival Sainsbury’s, which has a P/E of just over 15. Tesco has been the better buy, but there’s a fair chance its shares will slow from here.

So is that share price too good to be true? No, it reflects a really strong and well-run underlying business, one that’s well worth considering. However, today’s toppy P/E makes me think the shares will struggle to maintain their recent velocity. Mind you, I suspect I said that a couple of years ago, and look how well they’ve done since.

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