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Tesco vs Aviva: which is the best FTSE 100 stock to buy?

Scene depicting the City of London, home of the FTSE 100
Image source: Getty Images.

Tesco (LSE: TSCO) and Aviva (LSE: AV) are two blue-chip UK shares attracting plenty of attention from investors right now. But which is the best FTSE 100 stock to buy?

Time to buy Tesco?

The Tesco share price looks exceptionally attractive at current levels of 257p. City analysts think the supermarket’s earnings will leap 148% this fiscal year, leaving it trading on a forward price-to-earnings growth (PEG) ratio of just 0.1. Its 3.7% dividend yield also beats the broader FTSE 100 forward average of 3.4%.

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However, it could be argued that Tesco’s low valuation reflects its rising risk profile. First off, the supply chain problems that have hiked costs and resulted in empty shelves might be a long-term issue in a post-Brexit environment, as a recent letter from Marks & Spencer to its suppliers recently highlighted.

My biggest fear for the Tesco share price is the increasingly competitive environment which threatens to shrink its ultra-thin margins even more.

Today, the pressure mounted further as the Co-op entered the online battle by offering a same-day delivery service via Amazon’s Prime service. Meanwhile, discounters Aldi and Lidl continue on a course of rapid store expansion. And it’s possible Lidl will follow its German rival’s recent entry into e-commerce before too long.

A shopping basket filled with Tesco own-brand goods

Tesco’s still Britain’s biggest retailer by quite a margin. Theoretically it has the experience and the financial clout to see off its rivals and still deliver robust shareholder returns. Furthermore, the FTSE 100 grocer has the best online shopping operation in the business. However, it’s my opinion that the business may have to paddle even harder just to stand still.

A better FTSE 100 dividend stock to buy

I’d much rather ignore the low Tesco share price to buy other cheap UK shares. Which brings me neatly onto Aviva (LSE: AV).

This fellow FTSE 100 stock also offers plenty of value at recent prices of 405p. City analysts think the insurer’s annual earnings will fall 15% in 2021, but this still leaves it trading on a rock-bottom price-to-earnings (P/E) ratio below 9 times. Most importantly, its forward dividend yield, at 5.5%, beats Tesco’s by a large distance. And the dial moves to an impressive 6.3% for 2022 too.

There’s been disquiet in some quarters of late over Aviva’s huge disposal programme. In its bid to create a more streamlined entity, the financial colossus has hived off all its foreign operations, bar those in Canada and Ireland. This has consequently raised concerns over how the company will generate decent profits growth in the years ahead.

It’s my opinion that these huge asset sales will enable Aviva to concentrate both on those two key overseas markets and the core UK business much more effectively and efficiently.

As well, recent divestments have given Aviva the financial clout to launch a £750m share buyback programme. And this balance sheet boost should help it remain a generous dividend payer for some time yet.

So I think Aviva could be one of the best dividend stocks to buy on the FTSE 100 today.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Royston Wild has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Tesco and has recommended the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. 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.

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