Grocers took a beating this week, with Tesco (LSE:TSCO) shares in particular slipping 2.5% on Tuesday (5 May). Since falling from a high of 508p in late February, it’s struggled to recover the momentum enjoyed in 2025.

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.