Sainsbury’s and Tesco shares are up 20% but look cheap. Should I buy  in May?

Tesco shares are soaring and rival Sainsbury’s is following suit. They offer generous dividends too. Should I buy them both?

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I’m flabbergasted to see how well Tesco (LSE: TSCO) and Sainsbury’s (LSE: SBRY) shares have done this year. They’re on an absolute roll.

Since the start of the year, the Tesco share price has rocketed 22.22%, while Sainsbury’s is up 21.48%.

Measured over one year, they’re up 2.28% and 19.46%, respectively.

They’re flying high today

Investors might expect that kind of jump from a penny stock, but it’s quite something for the UK’s two biggest supermarkets, both big FTSE 100 players with market-caps of £20.39bn and £6.43bn respectively.

I’m particularly impressed given that conditions in the sector are so sticky right now. Both have had wafer-thin margins for years. Tesco’s is currently just 2.9%, while Sainsbury’s slices even thinner at 1.8%.

These are forecast to widen but only slightly – to 3.9% and 3.1% respectively. Companies in many other sectors would see that as a disaster, but supermarkets have huge fixed costs, with all those stores and staff.

I’ve talked up Tesco and Sainsbury’s on several occasions, but I’ve also had moments of doubt as German discounters Aldi and Lidl continue to munch into their market share.

Yet here they are today, delivering a rush of share price growth, with dividends on top. The recent share price hop has eaten into their yields, but Tesco is still forecast to pay income of 3.8% this year, covered twice by earnings. Sainsbury’s is forecast to yield an even juicier 4.9%, covered 1.7 times.

Naturally, dividends are never guaranteed and can be frozen, snipped or scrapped at any time. Tesco has frozen its dividend at 10.9p per share in 2023 while Sainsbury’s is also freezing its at 13.1p.

Tesco’s profits halved in 2023, although it still made £1bn. It expects profits to be flat this year. Yet management still felt able to announce a £750m share buyback. 

Sainsbury’s saw underlying profits before tax drop 5% to £690m, as it spend £560m battling to keep prices down in the cost-of-living crisis. It lifted guidance for this year, forecasting profit of £640m-£700m, beating consensus of £631m.

Another tough year ahead

While Aldi and Lidl remain a threat, it’s worth noting that Tesco and Sainsbury’s still have market share of 27% and 14.9% respectively, Kantar says.

Naturally, I wish I’d filled my basket with these two stocks at the start of the year, but that moment has passed. Should I purchase them today?

Both look decent value, trading at 12.6 and 11.9 times earnings respectively, although of course that’s not as cheap as they were.

While their share prices have soared this year, over five years Tesco and Sainsbury’s are down 8.66% and 8.76%. So their recent share price success isn’t exactly typical and I’d be surprised if they jumped another 25% in short order. This remains a competitive sector. Shoppers are under the cosh, and inflation isn’t beaten yet. 

I’d gladly hold both Tesco and Sainsbury’s in my portfolio, but I’d rather buy them after a dip than a spike. There are a few FTSE 100 dividend stocks I’d like to buy in May, and I can’t afford to purchase all of them.

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.

Harvey Jones 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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