Is FTSE 100 dividend stock Tesco a better value buy than Banco Santander?

Tesco plc (LSE: TSCO) or Banco Santader plc (LSE: BNC)? No contest, argues Royston Wild.

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If you’d invested in Tesco (LSE: TSCO) a year ago you’d now be celebrating wildly, the supermarket’s share price having ascended 23% in that time.

Investor demand really piqued in April after full-year results blasted past expectations and the FTSE 100 firm’s steady surge thereafter took it to the current four-year highs above 265p per share hit in the summer.

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But while many were popping champagne corks around the time that fiscal 2018’s financials were released, I was again warning shareholders that Tesco was already looking more than a tad overvalued. The sharp-sell off that accompanied the grocer’s half-year report a month ago proved my point as City sales forecasts missed the target.

The biggest concern for the so-called Big Four established chains is the ongoing disruption that Aldi and Lidl have caused to the British supermarket arena, and while Tesco has waded into the low-cost/value end of the market more recently, I’m not convinced that it has what it takes to compete with the newer kids on the block.

Competitive concerns

And latest figures from Kantar Worldpanel show why. The research specialist recently said that, in the 12 weeks to October 7, Aldi increased sales by 15.1%, the fastest rate of growth since January. Lidl grew revenues by a pretty impressive 10% in the same period too, smashing the tiny rise of less than 1% that Tesco reported back then.

It’ll be interesting to see whether the Hertfordshire chain’s newly-launched Jack’s stores can help it to close the sales growth gap between itself and the German Goliaths. I’m not holding my breath. The latter two know exactly how to play the value end of the market and are expanding aggressively to consolidate their dominance here.

Tesco changes hands on a reasonable forward P/E ratio of 15.5 times thanks to City analysts predicting a 17% earnings rise in the year ending February 2019. The supermarket is also expected to initiate a significant dividend hike, to 5.2p per share this year from 3p last time out, and thus a chubby yield of 2.4% can be enjoyed.

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The Footsie firm’s uncertain long-term profits outlook means that I’d much prefer to buy into Banco Santander (LSE: BNC) instead. And particularly as its current share price provides much better value.

An anticipated 4% profits rise in 2018 means the FTSE 250 bank boasts a lower forward P/E multiple of 9 times, while a predicted dividend of 22 euro cents per share yields a mammoth 5.1%.  Quite why it trades at such a discount to Tesco is beyond me, I’m afraid.

Last week Santander declared that attributable profit boomed 13% during January to September, to €5.7bn, the business reporting strong turnover growth in its established European marketplaces like Spain and Portugal, as well as in its promising emerging markets.

Of course, the impact of ongoing Brexit uncertainty in the UK casts some doubt on its operations over here, while the ascension of right-wing Jair Bolsonaro to the Brazilian presidency also adds doubt to economic conditions in that key growth market. But such troubles are more than baked into the current share price, in my opinion, and I believe Santander offers plenty of upside at current prices.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

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