These FTSE 100 value stocks have rock-bottom earnings multiples and huge dividend yields. Which one is the better buy?
Tesco
Supermarket Tesco (LSE:TSCO) might be retail royalty. But its shares command a very humble valuation, at least based on the City’s earnings forecasts.
For the financial year to February 2025, it trades on a price-to-earnings (P/E) ratio of 11 times. This is below the FTSE 100’s forward average of 12 times. Furthermore, the grocer carries a chunky 4.5% dividend yield.
Yet this is a UK share I don’t plan to buy next year. Its ultra-popular Clubcard loyalty scheme allows it to retain customers more effectively than its mid-tier rivals like Sainsbury’s. It is also successfuly winning customers from premium supermarkets through expansion of its Tesco Finest luxury lines.
However, the intense competition the company faces makes it one to avoid, in my book. Last week, the company upgraded its profits and free cash flow forecasts for the current financial year. This was thanks in large part to the positive impact of its ‘Save to Invest’ streamlining programme.
Effective cost-cutting meant adjusted operating margins at Tesco’s core UK and Irish retail unit rose 47 basis points in the six months to August, to 4.4%.
Still, those margins remain wafer thin. And the danger to them remains high as competition grows. Aldi and Lidl remain committed to rapid expansion of their distribution hub and store networks. Over the weekend, The Sunday Telegraph said that Waitrose is talking with Amazon about a potential delivery link-up, too.
Tesco isn’t the all-conquering retail beast that it once was. Indeed, its market share — and thus its ability to generate big profits — over the long term is likely to continue shrinking, while the pressure to cut prices will also mount.
Vodafone Group
Fellow FTSE 100 share Vodafone Group (LSE:VOD) is a much more attractive value stock in my opinion.
It trades on a P/E ratio of just 9.7 times for the financial year to March 2025. On top of this, its dividend yield for then stands at an enormous 8.8%. This is more than double the Footsie’s prospective average of 3.8%.
Like Tesco, Vodafone faces a severe threat in the form of huge competition. But I feel confident that it could still grow profits strongly for two reasons.
Firstly, demand for telecoms services should grow strongly over the next decade as the digital revolution clicks through the gears. The business is investing heavily in areas like 5G and broadband to exploit this opportunity, too.
Secondly, I think earnings from its African operations will surge as telecoms product penetration increases from its current low levels. Revenues at its Vodacom unit — which now covers Egypt alongside the likes of South Africa and Mozambique — rose 5.4% in the last fiscal year.
Customer numbers here continue to grow strongly, as well as at the firm’s M-PESA mobile money division.
Even if Vodafone does cut dividends some time during the next two years (as some brokers expect), strong cash generation means the business may well still deliver FTSE 100-mashing dividends over the period. I think it’s a bargain at current prices.
