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Are Tesco, Morrisons and Sainsbury’s shares great value?

The J Sainsbury (LSE: SBRY) share price slumped 10 days ago when the Competition and Markets Authority kiboshed its planned merger with Asda. With only anaemic earnings and dividend growth forecast for Sainsbury’s as a standalone business, I saw merit in selling the stock, and buying one with a more promising outlook.

Have Sainsbury’s subsequent results, reviewed by my colleague Roland Head, persuaded me to change my view? And, either way, do its sector rivals Tesco  (LSE: TSCO) and Morrisons  (LSE: MRW) have more promising outlooks?

Results

Sainsbury’s beat City forecasts of minimal growth. Earnings per share (EPS) came in at 22p, up 7.8% on the prior year. And the board lifted the dividend per share (DPS) by the same percentage to 11p.

Turning to the current financial year, analysts at Barclays noted: “Sainsbury makes no comment on PBT [profit before tax] consensus of £652m for 2019/20 (but is aware it would need to say something if this was plainly unachievable).”

Based on PBT of £652m, a tax rate of 24% guided by Sainsbury’s, and the company’s shares in issue, I calculate EPS at 22.4p (up 1.8%) and DPS at 11.2p (up 1.8%).

The table below summarises all three supermarkets’ historical and forecast earnings and dividend records, as well as their valuations.

 

Tesco

Morrisons

Sainsbury’s

2018/19 EPS (and growth)

15.52p (30.0%)

13.17p (8.0%)

22.00p (7.8%)

2018/19 DPS (and growth)

5.77p (92.3%)

6.60p (8.4%)

11.00p (7.8%)

2019/20 forecast EPS (and growth)

17.3p (11.5%)

14.1p (7.1%)

22.4p (1.8%)

2019/20 forecast DPS (and growth)

7.3p (26.5%)

7.0p (6.0%)

11.2p (1.8%)

2019/20 price-to-earnings (P/E) ratio

14.4x

15.2x

10.0x

2019/20 dividend yield

2.9%

3.3%

5.0%

Reference share price

249p

215p

223p

As you can see, Tesco and Morrisons have performed more strongly than Sainsbury’s.

Tesco

Chief executive Dave Lewis has done a great job in transforming the shambles of a company he inherited in 2014. In last month’s results, he was able to say: “After four years we have met or are about to meet the vast majority of our turnaround goals.”

The revived business, shrewd acquisition of manufacturer Booker providing an additional driver for growth, and collapse of Sainsbury’s merger with Asda, all contribute to Tesco’s promising outlook. Forecast EPS growth for the current year is 11.5%, and analysts have pencilled-in continuing double-digit growth for fiscal 2021. Meanwhile, increases in the well-covered dividend, ahead of EPS growth, are also forecast to continue.

Morrisons

Over at Morrisons, chief executive David Potts has also done a good job since taking the reins in 2015. He’s opened new channels of growth, such as a wholesale supply deal with McColl’s. In the company’s latest results, he said: “We remain confident that Morrisons still has many sales and profit growth opportunities ahead, and expect that growth to be meaningful and sustainable.”

The company has paid special dividends on top of a growing ordinary payout for the last two years. Analysts expect another in 2019/20, which would take the payout shown in the table above up to around 12.5p and the yield up to 5.8%.

Checkout

Due to Sainsbury’s weak growth outlook — and, I believe, high risk of earnings downgrades — I see a single-digit P/E (sub-200p share price) as warranted. My personal view remains there’s merit in selling the stock, and buying into one with a more promising outlook.

Tesco has such an outlook, and I don’t think its valuation (P/E 14.4) has become too stretched yet. I rate it a good long-term ‘buy’. I rate Morrisons a ‘hold’ at its P/E of 15.2.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. 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.