Of the five supermarket stocks listed on the London Stock Exchange, three are FTSE 100 companies that are in constant competition with each other.
Sainsbury is simply less profitable than its rivals. Its products are seen as more expensive than most, while it is simultaneously battling heavy debts and the competition of budget-friendly alternatives. It was in trouble even before Covid-19 entered our lexicon. Its share price hit £1.77 last August. This is just one penny more than its market crash price of £1.76 on March 12th, 2020.
However, I think both Tesco and Morrisons could be great supermarket stocks to add to my ISA.
The case for Tesco
Its ‘essential’ status helped avoid the drastic slumps of closure, but Tesco still felt the force of Covid-19. Its £2.08 low came on March 23rd, and despite months of turbulence, it has risen just 2.8% to its current price of £2.14 per share at the time of writing.
During the pandemic, Tesco doubled its online delivery capacity, proving its adaptability and creating 16,000 new jobs in the process – this should benefit the company during a second lockdown. It also has positive long-term implications as supermarket stocks in general prepare for a future that Alan Oscroft and I agree will see more customers sticking with online delivery.
It has also made impressive leaps to entice new shoppers. This includes its ‘Aldi Price Match’ scheme, designed to divert customers away from competitive budget supermarkets, and ‘Clubcard Prices’, which rewards loyalty with special sales. Its ownership of Booker, a grocery supplier with retail sales currently up 22%, adds another stream of income.
Finally, its dividend yield sits above 4.5%. This is attractive as it is, but the upcoming £8.2bn sale of its businesses in Thailand and Malaysia should lead to a payout of around £5bn!
The case for Morrisons
While Morrisons could be seen as the underdog of the FTSE 100 supermarket stocks, its share price has had a similar six months to Tesco. Its low of £1.63 came on March 16th, before a spiky attempt at recovery led it to its current price of £1.73. This is an increase of 6.1%.
Following in Tesco’s footsteps, Morrisons increased its capacity for online delivery fivefold. This helped it to weather the lockdown and prepare for a more online-centric future. The company is also modernising in other ways, creating ‘Morrisons on Amazon’ and working with Deliveroo in an attempt to appeal to a wider, probably younger, market.
These initiatives, coupled with its attempts to compete with budget supermarkets by introducing lower priced items, has helped the company hit an 8.7% rise in food sales in the first half of 2020.
While it might not have a £5bn payout under its belt, Morrisons’ 5% dividend yield is even greater than Tesco’s. Plus, Rupert Hargreaves thinks a 10p special dividend could be on the horizon.
Probably in anticipation of a second national lockdown, both Tesco and Morrisons are trading at a price only slightly higher than that of March’s stock market crash. I think this poses a distinct opportunity to invest cheaply in two stable and adaptable supermarket stocks with excellent future prospects.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Dan Peeke 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.