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Tesco shares? Don’t waste your money. I’d buy this dividend stock instead

With Tesco’s (LSE: TSCO) share price down nearly 25% over the last five years but showing signs of a recovery lately, many investors – including a few of my TMF colleagues – believe the stock offers upside at current levels. However, examining the outlook for Tesco, I’m not convinced that buying the shares right now is the best move. Here’s why.

Worrying threat

My biggest concern remains the threat of the German discount supermarkets – Lidl and Aldi (just recently Aldi was awarded the title of ‘Best Grocer’ at the Retail Week Awards). These two companies continue to aggressively grab market share, and I think this trend could continue for a while, which will put pressure on Tesco and the other large supermarkets.

The statistics are alarming for the traditional supermarkets. For example, according to research firm Kantar Worldpanel, for the 12 weeks to 30 December, all the major supermarkets lost market share, while Aldi’s sales jumped 10.4%, and Lidl’s by 9.4%. This took their combined market share to a record high of 12.8%, up an impressive 12% on the year before. Interestingly, around two-thirds of UK households visited an Aldi or Lidl over Christmas, which goes to show the popularity of these businesses today.

For the year ending 24 February 2020, analysts expect Tesco to generate earnings of 16.9p per share and pay out 7.3p in dividends. That places the stock on a forward P/E of 13.6, while the forecast dividend equates to a prospective yield of 3.2%. While the shares are not particularly expensive, I’m not seeing enough value on the table to convince me that they’re worth buying right now, given the challenging landscape.

A better dividend stock?

One stock that I think offers more appeal than Tesco right now is FTSE 250-listed Tritax Big Box (LSE: BBOX). This is a real estate company that is dedicated to investing in very large logistics facilities known as ‘big boxes’. These play a fundamental role in today’s retail environment, as they are used by online and omnichannel retailers such as Amazon, B&Q, and Argos to hold goods before they’re distributed to customers. Essentially, Tritax offers a way to profit from the boom in online shopping.

It owns an enviable portfolio of big boxes that are typically fully-let on long leases to blue-chip tenants, and this should help the company generate consistent returns for investors in the years ahead, irrespective of what happens with Brexit. Just recently, the group reported an 8% rise in adjusted earnings per share for 2018 and Chairman Sir Richard Jewson commented: “The quality of the Group’s portfolio and customer base mean that we are confident of continuing to deliver secure dividends to shareholders, resulting in attractive returns in a low-interest rate environment.”

Since its stock market listing in 2013 Tritax has built up a nice dividend growth track record and for 2019, the group is targeting a payout of 6.85p per share, which at the current share price, equates to a healthy yield of 4.8% – 50% higher than Tesco’s forecast yield. The shares currently trade on a forward P/E of around 20, which I believe is a reasonable price to pay for this niche property stock, and as such, I rate the stock as a ‘buy’ right now. 

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Edward Sheldon owns shares in Tritax Big Box REIT. The Motley Fool UK has recommended Tesco and Tritax Big Box REIT. 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.