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Can FTSE 100 supermarket giants Sainsbury’s and Tesco outperform the UK index?

Supermarket giants J Sainsbury’s (LSE: SBRY) and Tesco (LSE: TSCO) are high street mainstays, with millions of shoppers buying from them every day. However, what prospects are there for shareholders to boost their bank balance with them?

At the time of writing, Sainsbury’s shares trade at 205.7p, sporting a decent dividend of 5.36%. The Sainsbury’s board made a conscious decision years ago to keep the dividend cover at twice earnings, and the current cover is at this figure now.

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The key price-to-earnings metric stands at just 9.11, which is a reasonable level, lower than its rivals. However, when you look at the profit earned since 2016, the picture is exactly the opposite of what I want to see in a share: the profits are consistently decreasing every year…

2016 profits: £471 million
2017 profits: £377 million
2018 profits: £309 million
2019 profits: £219 million

There are a number of factors for this, but I believe the main one is the growth of German rivals Aldi and Lidl. I used to be a Sainsbury’s shareholder but made my first ever sale of any shares for more than 10 years in 2017 and I am glad I did: my selling price of 278.1p is far higher than the current price.

So what would I do now if I was a Sainsbury’s shareholder?

At current levels I would probably hold the shares, but not buy any more. The fundamental metrics do not make this share a sell, but there are better prospects out there to buy. Sainsbury’s profit margin is tiny at just 1%, and I can see Aldi in particular relentlessly gaining more market share.

Now let’s look at the giant with the blue hue, Tesco. At the time of writing the shares are trading at 237.8p, up from around 200p six months ago.

While Sainsbury’s is suffering from negative sentiment at the moment due to its botched Asda takeover attempt, Tesco is currently enjoying positive momentum. However, the fundamentals for the share are not good: the P/E comes in at 17.21, which is too high for my liking, and the dividend yield is just 2.43%.

And it gets worse. The company paid no dividend at all for the 2016 and 2017 financial years. It must be said that cover is good at over 3 times earnings, though.

Although Tesco has recovered from its whopping loss of £5,719 million in 2015 to post a profit of £1,320 million in 2019, I believe Britain’s largest supermarket is even more vulnerable to Aldi than Sainsbury’s.

I have visited a number of Tesco stores and there seems to be little positive to say about them. You could describe them as very similar to Aldi but with more brand names and higher prices. The key difference, though — they are much less busy.

I do practically all my shopping at Aldi and the stores are always packed. It is a ruthlessly efficient operation, in effect incentivising shoppers to work as trolley gatherers by the £1 loan fee imposed on them. The queues are as large as ever, but Aldi has efficiency measures such as multiple barcodes on stock to make them more quick to scan.

With Tesco not having the same overall quality as Sainsbury’s, I would certainly avoid Tesco shares.

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Mark does not own shares in any of the companies mentioned in this article. 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.