Never mind Tesco, is the Sainsbury’s share price the one to buy now?

Some investors are eyeing up Tesco plc (LON: TSCO) and J Sainsbury plc (LON: SBRY) as attractive investments now. I’m not so sure.

| 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.

The J Sainsbury (LSE: SBRY) share price is down 35% over the past 12 months, exacerbated by the failure of the planned merger with Asda.

It’s a very competitive environment, and without the claimed economies of scale that a mega-merger could possibly achieve, it’s difficult for Sainsbury to compete with the onslaught of Aldi and Lidl on top of the UK’s already squeezed marketplace.

The slightly upmarket appeal of Sainsbury appears to have largely evaporated these days, and I don’t know how it’s going to differentiate itself in now that it’s all down to price, price, price.

Bank?

Actually, one possible approach is to provide more in-store services, as I was reminded on Tuesday when I read of the appointment of Jim Brown as the new CEO of Sainsbury’s Bank. There’s nothing earth-shattering in that, but then I think back to Tesco (LSE: TSCO) and its diversification into banking and things like that leading up to its over-stretching crisis.

Sainsbury’s Bank seems to doing reasonably well, though operating profit from the company’s financial services (including Argos Financial Services) dropped to £31m in the 2018-19 year. To put that into some perspective, RBS reported operating profit of £1bn in its first quarter this year. And Sainsbury’s itself recorded a retail operating profit of £692m in the year just ended.

It’s only a few weeks ago that Tesco told us it was quitting mortgage lending, and was considering ways to dispose of the business entirely. As Kevin Godbold put it, “providing mortgages looks like another commodity-style pursuit with precious little to differentiate between one provider’s offering and another’s.”

No differentiation

When the main service a company is providing is a non-differentiated commodity, I don’t think adding more non-differentiated commodities is really providing much of a competitive advantage. We already have a very effective and efficient one-stop shop for all our run-of-the-mill stuff — it’s called the internet.

No, it seems to me that for a supermarket to compete, it increasingly needs to do so on price, so how do Sainsbury’s and Tesco shape up on that score?

I know some of my Fool colleagues are seeing Tesco at least as an attractive long-term buy at the moment. Looking at current forecasts for it, predicted EPS rises would drop the forward P/E to only around 12 by 2021, and the dividend would be up to a yield of 3.9%. And I’ll admit that looks like a tempting valuation right now.

And a look at Sainsbury’s shows a valuation that, on the face of it, looks even more attractive. Here we’re talking about an even lower 2021 P/E of 11, with a dividend yield of 4.6%.

Further ahead

But I think we need to look to the greater future here, and I reckon Edward Sheldon has picked up on that very well. He points out that consumer data experts Kantar Worldpanel saw no growth from Tesco or Sainsbury in the 12 weeks to 19 May. And that’s during a period when Lidl sales grew by 11.1% while Aldi recorded an 8.5% jump.

City analysts might be predicting decent growth for both over the next few years, but I don’t yet see where it’s coming from. In fact, I can see all of our big supermarkets experiencing a tighter and tighter competitive squeeze. And that, to me, is not an enticing prospect for my retirement investments.

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.

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.

More on Investing Articles

Investing Articles

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »