FTSE 100 supermarket wars! Which is the best stock to buy?

With failed mergers, intense competition and resignations affecting supermarkets, can their share price rises continue?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

We’ve seen a profound change in the way we shop for groceries since the days of market stalls and independent grocer shops. The Co-op dominated the high street of my youth with an occasional trip to Marks & Spencer for special occasion food. Latterly the big supermarkets like  Tesco (LSE: TSCO), J Sainsbury (LSE: SBRY), Morrisons and Asda charged ahead, steamrolling independent shops and dominating the food retail business with their tempting offers, all-encompassing stock levels and bright aisles.

In recent years, however, these stars have lost their shine and the big four have seen sales slow and profits slump as in the face of the onslaught from European low-price stores Aldi and Lidl.

So, are FTSE 100 supermarkets still worth investing in, or is their time almost up?

Tesco’s turnaround

Currently worth £23bn, Tesco has undergone a remarkable turnaround over the past five years in no small part thanks to its CEO Dave Lewis, who has unfortunately announced he is leaving.

However, the company has a 2% profit margin and less than 4% operating margin. These are very thin margins and if a no-deal Brexit happens, they will be severely tested when prices are hiked on imported goods and the value of the pound sinks further.

The company has ambitious plans, including opening 150 more Tesco Express branches over the next three years, along with four new superstores. It’s cut down on plastic waste and is introducing more plant-based products to meet customer demand. The purchase of wholesaler Booker is proving a good buy as it now supplies chain restaurants, corner shops, farm shops and delicatessens. It also has a growing number of own-label products that offer higher margins, and its own discount chain Jack’s. 

Tesco’s loyalty scheme still outshines all others and is beneficial to both sides. It gains a huge amount of knowledge about its customers, but it also builds customer loyalty.

Its debt ratio is 48% so there is room for manoeuvre there, but high debt is not something I think it should recklessly pursue. Its price-to-earnings ratio is nearing 18, which is no longer bargain territory and its dividend yield is 2.4%. There is growth potential here, but economic and political pressures remain a concern. 

Sainsbury’s strengthens

Slightly-higher-end rival Sainsbury’s has also seen a turbulent time of late. This was due to tough trading conditions, which reduced profits and trimmed margins, besides a failed merger with Asda, which could have potentially added £7bn to its value.

the Sainsbury’s profit margin is 0.75% and its operating margin is 1.1%, so they are almost as low as you can go. However, its debt ratio is lower than Tesco’s at 30% and it offers a nice dividend yield of 5%.

It is now on a cost-cutting mission to reduce expenses by £500m in the next five years. This will include closing around 60 Argos stores, integrating them into its supermarkets, along with the closure of 15 supermarkets and 40 convenience stores. However, in addition to the closures, it intends to open approximately 120 convenience stores.

I don’t think the chain is likely to go into administration any time soon and the Sainsburys share price rose almost 12% in September, which makes me think it’s making the right moves to strengthen its future.

Personally, I’d opt for Sainsbury’s over Tesco, as a stock to buy, because it offers a better dividend yield. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kirsteen 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.

More on Investing Articles

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »