The Tesco (LSE: TSCO) share price has risen about 10% over the last month. This sounds impressive. However, the FTSE 100 index has jumped 9.9% over the same period. So, when put into context with the footsie, the supermarket’s shares no longer appear to be market-beating.
Looking further back over five years, it appears that the only time Tesco shares have outperformed the FTSE 100 is through the recent coronavirus period. This is no surprise. During this period, many companies have had to stop operating but our need for food doesn’t go away. So, it’s likely all grocers will benefit, at least in the short term.
But is Tesco worth buying for the longer term?
Tesco share price leaps 4% on dividend
Of Tesco’s recent 10% price jump, 4% was due to news that the grocer will reward its shareholders by paying a dividend. Currently yielding around 2.91%, it’s attractive for some but almost half that of rival Sainsbury, now at 5.33%.
The news of the dividend raised some eyebrows. Tesco has generated pre-tax profits of £1.3bn over the 12 month period leading up to February 2020. But CEO Dave Lewis defended the decision by highlighting the chain’s need for capital to finance hiring new staff and its growing supply and distribution activities.
Indeed, Tesco may have to pay an estimated £925m to keep customers happy. Such large amounts may begin to undermine recent share price performance in the long run. The next two months’ revenue figures could help to show whether Tesco’s March boom is sustainable.
Tesco is said to be a leader in its field. Moreover, it’s had a good recovery under its new CEO since the accounting scandals and profit warnings of 2014. The company has made a name for itself with online shopping and has a well-established platform. However, its competitors are catching up and I’m struggling to see how the grocer will maintain its leading position.
Morrisons is growing its market share
One such rival is FTSE 100 grocer Morrisons (LSE: MRW).
Morrisons is very much the smallest of the big four grocers. Its share price has been disappointing but there are many reasons to be optimistic about the future.
For starters, Morrisons is expanding. Recent agreements with McColls and Amazon are generating new customers. This is giving more competition to the bigger grocery chains, and in particular, Tesco Metro and Sainsburys Local. Amazon Prime customers can now stock up on Morrisons groceries for same-day delivery. I don’t think any other online food retailer offers this service.
Morrisons profit margins are similar to its peers. However, some analysts believe the smaller supermarket to have a more efficient cost structure. This bodes well for the future as coronavirus-induced pressures on logistics will be expensive. It will also help having a stronger balance sheet and no notable pension deficit to fund.
At 3.69%, Morrison’s dividend yield is better than Tesco. The company has a history of well covered and growing dividends, making it attractive for income investors. And some analysts expect Morrisons business model to take off, growing its share price. This makes it a good choice for value investors too.
As the FTSE 100 recovers from the stock market crash, it may leave the Tesco share price behind. But I think Morrisons is better placed to go with it.
