Conventional investing wisdom suggests food retailers like FTSE 100 stock Tesco (LSE: TSCO) are great buys when times get difficult. Eating is one of the things people have to keep doing whatever the weather. So, in theory, profits at businesses like this should remain relatively stable.
Recent evidence shows that this rule doesn’t apply during the current downturn. This week, Morrisons said that like-for-like sales were down 6.4% in the 13 weeks to 1 May as soaring inflation hit consumer confidence.
Established operators like Tesco are caught between a rock and a hard place. They can aggressively slash prices at the expense of profit margins. Or they can resist the temptation and lose swathes of customers to low-cost chains like Aldi and Lidl.
Pressure is growing
The pressure on Tesco to cut prices is accelerating sharply too. On Wednesday, budget chain Poundland announced that 60% of its products will sell for £1 and below by the end of this week. That’s up from approximately 50%.
The problem for Tesco is that it may have limited wiggle room to reduce prices even if it wants too. Also in midweek, the retailer said it would stop selling products from Kraft Heinz in a dispute over pricing. The loss of consumer staples like Heinz’s ketchups, baked beans and soups is a big blow. It might not be the last loss it faces either as inflationary pressures hit food producers.
On the plus side, I like Tesco’s market-leading online operation. This could support strong and sustained profits growth over the longer term as e-commerce grows. But I don’t think this offsets the host of other problems the company faces.
This is why I’d leave the supermarket on the shelf, despite its 4.2% dividend yield.
A better FTSE 100 buy
Banking stocks like Standard Chartered (LSE: STAN) are also in danger as runaway inflation dents the global economy. They could actually be considered riskier for an investor right now than the likes of Tesco. Profits at banks are much more sensitive to changes in economic conditions.
That said, I’d much rather buy this FTSE 100 stock than the battered supermarket. StanChart trades on a forward price-to-earnings (P/E) ratio of 8.6 times. This is below the bargain-benchmark of 10 times that is suited to high-risk shares and suggests the risks to earnings forecasts are baked into the share price.
I’d also rather buy the bank despite its inferior 2.4% dividend yield for 2022. I’d be prepared to suck this up, given the possibility of ripping profits and dividend growth further out. Indeed, City analysts think 2023’s dividend will rise 26% year-on-year.
I like Standard Chartered because of its extensive footprint across Asia and Africa. I believe this could supercharge returns to the bank’s investors as demand for financial products soars in these emerging markets. As someone who invests for the long term I think this business is a great buy at current prices.
