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Recent news makes me even more wary of this ‘bargain’ FTSE 100 dividend stock

Supermarket and FTSE 100 member J Sainsbury (LSE: SBRY) share price is now lower than it’s ever been.

Some of this is clearly attributable to the company’s failed merger with Asda after it was blocked by the Competition and Markets Authority (CMA) back in April. However, recent data from market research Kantar also helps explain why investors are continuing to desert that £4.4bn-cap grocer.

In the 12 weeks to 19 May, Sainsbury’s market share stood at 15.2% — identical to that of Asda. Morrisons had a 10.4% slice of the pie. Worryingly for those still holding its stock, the market share of German discounters Aldi and Lidl was a combined 13.8%. That’s both a record and a painful reminder to the listed supermarket giants just how popular its privately-owned rivals are becoming. 

According to Kantar, Aldi attracted almost one million more customers to its tills compared to last year, even though growth in the grocery market was less than half that achieved in 2018 (1.3% vs 2.7%) due to the more unsettled weather in 2019.

Should Brexit, or some other political or economic event, cause the UK economy to stutter (and consumers to become even more price conscious than they already are), I can see this kind of relentless growth only increasing.

Value trap

Shares in Sainsbury’s now trade on a forward price-to-earnings (P/E) of 9.5 — far less than its average of almost 14 over the last five years. That must be tempting for at least some contrarians, particularly those who are also looking to secure suitably large compensation for their willingness to wait for a recovery. Assuming analysts are correct in predicting an 11p per share return in 2019, the stock yields 5.5%. 

Trouble is, I can’t see a catalyst for that recovery. In fact, it doesn’t feel over the top to suggest that Sainsbury’s (which also owns Argos) might eventually slip out of the top tier like Marks & Spencer surely will next week.

Considering the highly competitive nature of the sector, I think it makes sense to back the leader of the listed pack if you’re comfortable taking the risk of buying individual company shares. That would be Tesco, of course.

Although overall sales were flat in the 12 weeks to 19 May, this was better than the falls in year-on-year numbers seen at Sainsbury’s, Asda and Morrisons. And even though we can’t put too much weight on such a short trading period, few would contest that CEO Dave Lewis has done an admirable job of turning the juggernaut that is Tesco around since the ex-Unilever man was brought in following that huge accounting scandal.   

Its shares are currently available for 13 times forecast earnings. That’s considerably more than those of Sainsbury’s but actually less than those of Morrisons. Since it still dominates with a 27.3% slice of the market, that looks reasonable to me.

A 3.5% dividend yield this year will likely be covered over twice by expected profits, making the company a safe destination for income-focused investors to park their cash, at least for now. 

Naturally, Tesco certainly isn’t immune from the rise of the discounters and my inclination would probably be to avoid this part of the market entirely right now. But, as part of a fully-diversified large-cap portfolio, there’s surely more sense in holding this stock over any of the others if you truly must own one. 

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Paul Summers 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.