There has only been one winner between Sainsbury’s (LSE: SBRY) and Tesco (LSE: TSCO) shares in the past year. The former is up 11% while the latter has jumped 28%. Sainsbury’s has a higher dividend yield, but that wouldn’t have come close to making up the difference.
Which one looks the most attractive moving forward? Here’s my opinion.
Operational performance
In Q1, total retail sales (excluding fuel) at Sainsbury’s rose 4.9%, with grocery sales up 5%. This period marked its highest market share since 2016, as its ‘Aldi Price Match’ scheme and Taste the Difference premium ranges proved popular.
Argos grew 4.4%, despite a challenging market, and womenswear was up 13%. Overall, like-for-like sales rose 4.7%.
Meanwhile, the full-year profit outlook remains steady, with the company aiming for £1bn in retail underlying operating profit and £500m+ in free cash flow. Cost savings are also on track, with £1bn targeted by March 2027.
As for Tesco, the UK’s leading supermarket saw its Q1 sales rise 4.6%, with UK sales up 5.1% on a like-for-like basis. Its market share now stands at a commanding 28.3%.
The fresh food and premium ranges performed well, with Finest range sales up 18%. Wholesale business Booker also enjoyed solid growth, despite a decline in tobacco sales. Ireland (+5.5%) and Central Europe (+4.1%) posted strong growth too.
Looking forward, management maintained full-year guidance, with £2.7bn–£3.0bn in adjusted operating profit expected. And Tesco continued its £1.45bn share buyback, with around a third already completed.
In short, both FTSE 100 supermarkets have been performing well so far this year. I find it hard to split them, really.
Income prospects
Turning to dividends, Sainsbury’s offers a higher yield than Tesco shares, which is unsurprising given the difference in share price performance. As Tesco has motored higher, the yield has fallen due to the inverse relationship between share price and dividend yield.
For this fiscal year ending March 2026, Sainsbury’s is forecast to dish out 14.1p per share. That would be a 4% rise year on year.
However, following the sale of Sainsbury’s Bank, there will be a special dividend on top later this year. Including this, the payout jumps to 18.5 per share, which results in a forecast 6.1% yield. This will then normalise to 5% the year after.
Meanwhile, Tesco’s forecast yield is lower at 3.2%, rising to 3.8% next year.
Of course, these are just projections and not set in stone. Dividends are never guaranteed.
Based on this though, Sainsbury’s is arguably the more attractive stock when it comes to near-term income. It’s also slightly cheaper, with a forward price-to-earnings ratio of 12 compared to Tesco’s 14 (both for next year).
My pick
Naturally, there are risks. The main one I see is the possibility of an all-out price war between the supermarkets. This hasn’t happened yet, but there has been some chest-thumping words from Asda about taking back market share.
The problem with this is that supermarkets operate with thin profit margins, so the last thing Tesco and Sainsbury’s would want is severe trolley wars.
I like Tesco’s market-leading position and future passive income prospects. But given the risks, I’m not keen to add either stock to my ISA right now.
