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Which is better, the rising share price of Tesco or Ocado?

Shares in Ocado Group (LSE: OCDO) are up 48% so far in 2019, but took an 8% fall Monday morning after the online food firm announced a new bond offering.

It will amount to approximately £500m of guaranteed senior unsecured convertible bonds due, in 2025, and the company says the cash will be “used to fund capital expenditure in relation to Ocado Solutions’ commitments and general corporate purposes.” 

Top technology

Ocado Solutions is the company’s technology division, and the latest fundraising comes just days after another new deal, this time with Aeon, was announced. Aeon is described as “one of Japan’s longest-established retailers with almost a century of experience serving Japanese customers.” Apparently it’s also one of Asia’s biggest, and the agreement will see Ocado supplying its “proprietary customer fulfilment centres (CFCs) and end-to-end software applications.” There should be more to come too, with Aeon “expected to commit to further CFC capacity in the period following its first CFC going live.”

I’ve been cool about Ocado,  but I did make the early mistake of seeing it as just another UK online supermarket, and it’s clear that it’s become a lot more than that. As a pioneer of automated warehousing and stock picking, it’s pretty much turned into the go-to company for those wanting to set up in the online shopping and deliveries business, and there’s room for that to become huge.

It’s still hard to put a valuation on Ocado shares, as there’s no profit expected for at least the next couple of years. But with the potential growth of the global food distribution market, I think Ocado shares are looking increasingly like a long-term buy.

Back to normal?

Tesco (LSE: TSCO) shares, meanwhile, have put on 20% so far in 2019, for a healthy 39% gain over five years.

Tesco’s return to earnings growth has been impressive, but I think the real strength lies in the rapid rise in dividends over the past few years. A dividend of 3p per share was paid for the year ended February 2018, and that already looks set to rise to 8p for the current year and 9p for next.

On the current share price, that would give us yields of 3.5% and 3.9% for the two years respectively. They’d be more than twice covered by earnings too, and I see that as really very good for the supermarket sector.

Competition

The downside for me is that it’s such a competitive business, and the ongoing expansion of Lidl and Aldi really means the traditional UK supermarkets need to be constantly looking over their shoulders. Saying that, if you want to invest in the sector, I think it makes sense to go for the one with the biggest market share.

That’s still Tesco by a mile, commanding 27% of the market – between them, Aldi and Lidl have 14%. The blocking of the Sainsbury-Asda merger can only help Tesco, and if it’s a representative example, I think we can expect regulators to be averse to any other big mergers that might come up.

Tesco has one advantage over Ocado, in that it’s much easier to put a valuation on the shares. And on a forward price-to-earnings ratio of 13.5, I don’t think it’s a stretching valuation.

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Alan Oscroft 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.