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4 Ways Tesco PLC Will Continue To Lead The Food & Drug Retailers Sector

Right now I’m comparing some of the most popular companies in the FTSE 100 with their sector peers in an attempt to establish which one is the more attractive investment.

Today I’m looking at Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US).

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Valuation

Let’s start with the basics, Tesco’s valuation in relation to its peers and the wider sector.

Unfortunately, due to a number of one-off losses during 2012, Tesco reported a significantly lower than average profit. This means that Tesco is trading at a historic P/E of 21.

However, after excluding these one-off losses, Tesco is trading at a historic P/E of just 10.3, lower than the food and drug retails sector average of 14.

What’s more, Tesco’s closest London listed peers, Wm. Morrison Supermarkets (LSE: MRW) and J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) trade at historic P/E ratios of 10.7 and 12.2 respectively. 

Balance sheet

  Net-debt-to-assets Interest cover by operating profit
Tesco 16.6% 8x
Morrisons 20% 13.6x
Sainsbury 17% 7x

When it comes the balance sheet, Tesco is also in a winning position. Indeed, the company has the lowest net-debt-to-assets ratio and interest costs are covered around eight times by operating profit.

Furthermore, Tesco is actually paying down debt unlike its close peers, both of which are either increasing or maintaining their debt piles. In particular, between Tesco’s 2012 half year report and the same period during 2013, Tesco paid down £2 billion in debt, a reduction of nearly 20%. 

Company’s performance

  Earnings growth past five years Net profit margin
Tesco 24% 4.4%
Morrisons 53% 4%
Sainsbury 54% 2.6%

As I have already written above, a number of one-off items affected Tesco’s profitability during 2012, so the figures above are adjusted to exclude one-offs.

Still, even when using adjusted figures Tesco’s earnings growth has lagged that of its closest peers during the past five years.  

Dividends

  Current Dividend Yield Current dividend cover Projected annual dividend growth for next two years.
Tesco 4% 2.4 6%
Morrisons 4.1% 2.3 14%
Sainsbury 4.2% 1.8 8%
Sector average 3.8% 1.9  

What’s more, as shown above Tesco is also lags its closest peers on the dividend front. That said, the company’s dividend payout does have the highest cover by earnings of the trio, which indicates that the company has plenty of room for payout growth, even if earnings continue to fall.

Additionally, Tesco’s dividend yield is slightly higher than the sector average, although the company’s payout is only expected to grow a minuscule 6% annually for the next two years. 

Foolish summary

All in all, despite the negative press Tesco has received during the past few years the firm still looks appealing. Specifically, on an adjusted basis the company is the cheapest of its closest peers and, the company’s size in comparison to its peers is a huge bonus.

So overall, I feel that Tesco is a much stronger share than its peers. 

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> Rupert owns shares in Tesco. The Motley Fool owns shares in Tesco and recommends shares in Morrisons.