The past six months have been tough for British consumers. Soaring inflation, record energy bills and rising interest rates have hammered disposable incomes. Yet Tesco (LSE: TSCO) and J Sainsbury (LSE: SBRY) shares have surged since October. So what’s going on?
Tesco slumps
At their 52-week peak on 28 January last year, Tesco shares hit an intra-day high of 304.1p. But then a whole host of global problems — including Russia invading Ukraine — send stock markets tumbling. At its 52-week low, the supermarket’s stock plunged to 194.35p on 13 October, but has since rebounded strongly.
As I write on Monday afternoon, the Tesco share price stands at 243.7p, up 25.4% from its 2022 low. Yet this popular and widely held stock is still down 16.7% over the past 12 months — and it has lost 6.1% over the last five years.
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Sainsbury’s follows suit
Meanwhile, shares in the UK’s #2 supermarket have followed a similar downward path. On 19 January 2022, Sainsbury’s share price hit its 52-week high of 303.6p. But as global gloom descended, down went this stock. At its 52-week low on 7 October, it bottomed out at a mere 168.7p.
However, Sainsbury’s shares then followed a similar trajectory to Tesco stock to currently trade at 247.2p. This leaves them a whopping 46.5% above their October low. That’s an impressive comeback. As a result, this FTSE 100 share is down 11.4% over one year and 2.1% over five years. That’s a similar tale to Tesco shares.
So which one would I buy?
As a veteran value investor, I like to buy cheap value, income and dividend shares. In other words, I expect my returns to come from both regular cash dividends and occasional capital gains from selling. I like to buy into quality companies at reasonable prices, so how cheap (or expensive) are Sainsbury’s and Tesco shares today? Here are their share fundamentals:
| Company | Sainsbury’s | Tesco |
| Market value | £5.8bn | £17.9bn |
| Price-to-earnings ratio | 10.2 | 19.7 |
| Earnings yield | 9.9% | 5.1% |
| Dividend yield | 4.9% | 4.7% |
| Dividend cover | 2.0 | 1.1 |
The first thing I’d point out is that Tesco’s market cap is almost three times that of Sainsbury’s. This reflects Tesco’s multi-decade rule as the UK’s biggest supermarket. Currently, it has a 27.5% share of the grocery market, versus 15.5% for Sainsbury’s.
The second thing I notice is that Tesco’s price-to-earnings ratio is almost twice that of its smaller rival. In other words, Sainsbury’s shares are almost half as ‘expensive’ as Tesco stock. But that could be because investors regard the bigger firm as a safer bet and, therefore value its earnings much more highly.
I don’t own either stock, but which would I buy today? For me, the winner has to be Sainsbury’s. This is because its near-10% earnings yield covers its dividend yield twice over. At Tesco, dividend cover is just 1.1, leaving little margin for error. Hence, I’ll suggest to my wife that she might consider buying shares in Sainsbury’s for our growing family portfolio!
