Do FTSE 100 supermarkets Sainsbury’s and Tesco make good long-term investments?

The Tesco and Sainsbury’s share price volatility is set to continue. But do these FTSE 100 (INDEXFTSE:UKX) supermarkets cut it as long-term investments?

| 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.

With volatility in the financial markets and a potential lockdown hovering over our heads, supermarkets are again in the spotlight. FTSE 100 constituents Sainsbury (LSE:SBRY) and Tesco (LSE:TSCO) have both experienced share price volatility and each has mounting challenges to face. But do supermarkets make a good long-term investment and are they strong enough to survive and thrive in the coming years?

Challenging times

As the first lockdown got under way, it looked as if supermarket profits were rising, but it soon became apparent that additional costs would wipe out most of the gains. Costs include heightened sanitising efforts, a rise in recruitment and investing in technology to improve delivery efficiency. Government tax relief will partly offset these added costs, but shrinking profit margins are not so easily fixed.

Amazon is elbowing its way into the sector with Amazon Fresh, delivering fresh food for free to its Prime customers in London and surrounding areas. Although a fledgling operation, this could rapidly become a bigger problem for existing supermarkets if Amazon continues its expansion throughout the UK. Tesco is planning to retaliate with a wider free delivery option and Morrisons is expanding its Amazon store. A price war could be ahead and wouldn’t be great for profits.

Share price volatility

Like most businesses in the FTSE 100, Sainsbury’s is experiencing share price volatility. Unfortunately, its troubles began before the pandemic hit and those problems haven’t gone away. It’s not as profitable as its competitors and is considered more expensive. It has a lot of debt and the rising popularity of budget supermarkets Aldi and Lidl have also added to its woes. Year-to-date, the Sainsbury’s share price is down nearly 14% and it suspended its dividend. It has a price-to-earnings ratio (P/E) of 33, based on earnings per share of 6p.

Nonetheless, a show of faith helped the Sainsbury’s share price rise last week after it was reported Czech billionaire Daniel Kretinsky has built a 3% stake in the supermarket via his investment vehicle VESA Equity Investment. The move makes him the fourth-largest shareholder in the group with a stake worth £130m. He may be an opportunist, but it gives shareholders confidence that they’re not investing in a lost cause. There’s speculation he wants to shake up the supermarket to boost profits. He also owns a 13% stake in Royal Mail.

Tesco shows ambition

The Tesco share price has also endured volatility, crashing to a low of £2.11 both in March and July. It’s creating 16,000 new jobs to ramp up its shift to online orders, showing it has confidence in its ability to meet consumer needs. Tesco owns Booker, which supplies independent grocery shops throughout the UK. This gives it an added income stream. It also benefits from its astronomical cache of data, which it gleans from customer transactions. The precision of data it collects helps Tesco plan product launches and tailor its marketing. Tesco’s P/E is 22, earnings per share are 10p and its dividend yield is 4%.

If you’re buying shares in the UK, supermarkets could be tempting as long-term investments. I think Sainsbury’s and Tesco are here to stay, but increasing competition and a changing consumer environment could pose challenges. I don’t think either offers much room for profit growth in the near term, but Tesco looks like it’s on a more profitable path long term.

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.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Kirsteen has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Tesco and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. 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 »