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Forget the Tesco share price. I’d buy this FTSE 100 champion instead

Tesco (LSE: TSCO) is a FTSE 100 stock that tends to divide opinion. On one hand, you have investors who believe the Tesco share price offers a lot of value. On the other, there are those who are concerned about the level of competition the supermarket giant is currently facing.

Personally, I’m in the latter camp. Here, I’ll explain why I see little appeal in Tesco shares right now, and highlight a FTSE 100 stock I’d buy instead.

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Losing market share

The issue I just can’t get past with Tesco is the threat of Aldi and Lidl as well as online grocer Ocado. Just look at the recent supermarket sales data from research firm Kantar.

According to Kantar, for the 12 weeks to 30 December, sales at Tesco fell 1.5% compared to last year, with its market share decreasing 0.4 percentage points to 27.4%.

By contrast, Aldi’s sales were 5.9% higher, with its market share growing 0.4 percentage points to 7.8%, while Lidl enjoyed sales growth of 10.3%, which pushed its market share up to 5.9% from 5.3% last year. Combined, the German discount supermarkets had a market share of 13.7% – more than treble what they had a decade ago, which gives you an indication of the growth they’ve achieved.

Meanwhile, the UK’s fastest-growing supermarket, Ocado, registered sales growth of 12.5% over the period.

Worryingly, in Tesco’s recent third quarter and Christmas trading update, chief executive Dave Lewis said: “We performed well.” If that’s the case, I’d hate to see a poor performance.

Tesco shares currently remain a long way below their 2007 highs of around 500p. However, that doesn’t necessarily mean the shares are now a bargain. In my view, the supermarket landscape has been permanently disrupted over the last decade and Tesco has lost its competitive advantage. With the stock trading on a forward-looking P/E ratio of 14.5, I don’t see much investment appeal.

Going from strength to strength

One FTSE 100 stock I’d buy over Tesco is Legal & General Group (LSE: LGEN). It trades at a lower valuation (forward-looking P/E ratio of about 9.2) and sports a much a higher dividend yield as well. Currently, the prospective yield is nearly 6%, versus 3.4% for Tesco.

Unlike Tesco, Legal & General appears to have plenty of momentum at the moment. For example, in a trading update in November, the group advised that its institutional retirement business (which helps companies offload their pension risk) had completed £8.5bn worth of deals in the first 10 months of 2019 and that it had a pipeline of deals worth £3bn it was expecting to complete by year-end. In 2018, deals totalled £9.1bn, so that looks like a decent performance.

Additionally, the group advised that its investment management business had achieved external net flows of £83bn in the year to 31 October and that assets under management at 31 October were £1.2trn, up £200bn since the start of the year.

It’s also worth noting that CEO Nigel Wilson said the business “continues to go from strength to strength” and that management remains confident in the group’s ability “to grow sustainable profits over the long-term.”

All things considered, I see considerable investment appeal in Legal & General shares right now. Given the group’s momentum and the stock’s low valuation, I believe LGEN is a better long-term buy than Tesco shares.

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Edward Sheldon owns shares in Legal & General Group. 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.