Head to Head: The Supermarkets

LONDON -- In this series, some of your favorite FTSE 100 (UKX) shares go head to head in a three-round contest for superiority.

In Round 1, the firms fight on earnings; in Round 2, on dividends; and Round 3 is a battle of the balance sheets. The winner will be the company that has racked up most points at the end of the contest.

In a twist to the usual format, we have three companies stepping into the ring today: Tesco (LSE: TSCO.L  ) , J Sainsbury (LSE: SBRY.L  ) and Wm Morrison (LSE: MRW.L  ) .

Fears about the fragile economy and eurozone worries have driven investor demand for defensive companies -- companies that perform reasonably well in all economic conditions -- including supermarkets.

The shares of Tesco, Sainsbury and Morrison have outperformed the FTSE 100 index over the last six months. The Footsie is flat over the period, but Tesco is up 11%, Sainsbury 13% and Morrison 3%.

Let's take our seats at ringside.

Round 1: Earnings

Tesco

Sainsbury

Morrison

Recent share price 347p 331p 292p
Last year price-to-earnings (P/E) ratio 9.2 11.8 11.4
Current year forecast P/E 10.2 11.3 10.7
Four-year average earnings-per-share growth (%) 8 9 7
Current year forecast EPS growth (%) -1 5 8
Forecast operating margin (%) 5.4 3.2 5.1

Source: Digital Look. Winners in bold.

Tesco scores points for its low P/E and industry-leading operating margin. It just loses out to Sainsbury on historic earnings growth but falls down badly on forecast earnings growth, where Morrison takes the point.

Nevertheless, Tesco's P/E and margin give it a comfortable victory in the first round.

Round 2: Dividends

Tesco

Sainsbury

Morrison

Last year dividend yield (%) 4.3 4.9 3.7
Current year forecast dividend yield (%) 4.3 5.0 4.0
Four-year average dividend growth (%) 8 8 23
Current year forecast dividend growth (%) 1 3 10
Forecast dividend cover 2.3 1.8 2.3

Source: Digital Look. Winners in bold.

Sainsbury starts the second round strongly, out-pointing its rivals by some margin on historic and forecast dividend yield. However, Morrison is equally dominant in winning points for historic and forecast dividend growth -- and pips Sainsbury to victory in the round by sharing a point with Tesco for dividend cover.

Mustering just half a point, this is a poor round for Tesco after its commanding performance in the first round.

Round 3: Balance sheet

Tesco

Sainsbury

Morrison

Price-to-book ratio 1.6 1.1 1.3
Net gearing (%) 53 35 32

Source: Digital Look. Winners in bold.

Tesco weakens further in the final round, with Sainsbury and Morrison sharing the points. Overall, Tesco has won one round, Morrison has won one round, and Sainsbury and Morrison have drawn a round. The points tally comes out as Morrison 4.5, Sainsbury 4.0, and Tesco 3.5.

Post-match assessment
This was a narrow victory for Morrison in a hard-fought contest. Tesco scored particularly well for its earnings rating and Sainsbury particularly well for its dividend yield. But Morrison's all-round performance won the day. Morrison was very strong in the areas of forecast earnings and past and forecast dividend growth, supported by good dividend cover and conservative gearing.

Morrison is also the pick of the supermarkets in the eyes of U.K. master investor Neil Woodford, whose funds have beaten the wider market by over 300% in the last 15 years. In fact, Woodford has increased his stake in Morrison this year.

Meanwhile, U.S. investing legend Warren Buffett has also bought a trolley-load of shares in a U.K. supermarket this year. Does Buffett see eye to eye with Woodford? Find out in this special Motley Fool report -- "The One U.K. Share Warren Buffett Loves" -- which you can download for free.

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Further investment opportunities:

G. A. Chester does not own shares in any of the companies mentioned in this article. The Motley Fool owns shares of Tesco. The Motley Fool has a disclosure policy.
We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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