4 reasons I’d buy Tesco stock over Sainsbury’s shares

Edward Sheldon has been analysing both Tesco and Sainsbury’s shares. If he had to choose one stock to buy, he’d go with the former.

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Tesco (LSE: TSCO) and Sainsbury’s (LSE: SBRY) shares are both popular with UK investors. It’s easy to see why – both are well-known ‘blue-chip’ companies that pay regular dividends to their shareholders.

Right now, I don’t own either stock. But if I had to buy one, it would be Tesco. Here’s why.

Tesco is growing faster

Looking at the two supermarket companies today, one thing that strikes me is that Tesco is growing at a faster rate than its rival right now.

Last financial year, Tesco generated revenue of £65.8bn while Sainsbury’s revenue was £31.5bn. This year, analysts expect the two companies to report figures of £68.3bn and £32.2bn, respectively. That equates to growth of around 3.8% for Tesco and 2.2% for Sainsbury’s.

That’s a significant difference in top-line growth and it shouldn’t be ignored. It’s much easier for a company to grow its earnings, and dividends, if its top line is rising.

More reward programme members

Another thing that stands out to me is that Tesco’s reward programme has more members than that of its rival.

Today, Tesco’s Clubcard programme has over 20m members. By contrast, the Sainsbury’s Nectar programme (which isn’t exclusive to Sainsbury’s) has about 18m members.

This gives Tesco an edge, in my mind. The data grocery companies collect from their customers is valuable. It allows the businesses to better understand those customers and target them with more tailored offers. This, in turn, brings shoppers back into the stores and boosts sales.

Lower valuation

Tesco also appears to be a little cheaper than Sainsbury’s from a valuation perspective.

Currently, analysts expect Tesco to generate earnings per share (EPS) of 21.4p this financial year while they expect Sainsbury’s to post EPS of 20.6p.

This means that at their current share prices, Tesco has a forward-looking price-to-earnings (P/E) ratio of 12.3 while Sainsbury’s has a P/E ratio of 13.4.

Less interest from short sellers

Finally, Tesco is attracting far less attention from short sellers than Sainsbury’s is right now.

According to data provider 2iQ Research, 8.6% of Sainsbury’s shares are on loan at present. By contrast, the figure for Tesco is just 0.18%.

This indicates that there are a lot more hedge funds and institutional investors betting against Sainsbury’s than there are betting against its larger peer.

I’d buy Tesco shares

Now, of course, Sainsbury’s does have some things going for it.

For example, its dividend yield is slightly higher. Currently, Sainsbury’s has a yield of around 4.5% versus 4.1% for Tesco. So, the shares could be more attractive to income investors.

But Tesco has its risks. For example, it’s facing intense competition from Aldi and Lidl right now. Meanwhile, its Chairman is shortly set to step down and no replacement has been announced yet.

Overall though, I think Tesco has more going for it from an investment perspective.

I’d buy its stock over that of Sainsbury’s if I was looking to invest in a UK supermarket company today.

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 assessed. Consider taking independent financial advice.

Edward Sheldon has no position in any of the shares mentioned. The Motley Fool UK has recommended J Sainsbury Plc and Tesco Plc. 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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