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




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




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




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.

Finally, if you're interested in knowing which other blue-chip companies Woodford currently favors, I recommend you also download the exclusive Motley Fool report -- "8 Shares Held By Britain's Super-Investor." Again, the report is 100% free and can be in your inbox in seconds simply by clicking here.

Are you looking to profit as a long-term investor? "10 Steps To Making a Million in the Market" is the Motley Fool's latest guide to help Britain invest. Better. We urge you to read the report today -- while it's still free and available.

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.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2011460, ~/Articles/ArticleHandler.aspx, 10/24/2016 6:44:49 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 days ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes