When I bought Tesco shares, did I back the wrong horse?
Not so long ago, I added some Tesco (LSE:TSCO) shares to my ISA. Due to its defensive qualities, I thought it was the sort of stock that I should own during a period of global uncertainty. Although conscious of the sector-specific risks, including a fiercely competitive market and wafer-thin margins, I was content with my choice.
Every little helps
And the grocer’s most recent trading update, for the 13 weeks to 24 May, hasn’t disappointed me.
Over the quarter, non-fuel like-for-like sales increased 4.6% compared to the same period in 2024. This was helped by its Finest range, which saw an 18% year-on-year increase. Online sales were up 19.8%. Impressively, Britain’s largest grocer has now recorded 24 consecutive four-week periods of market share gains.
And it’s retaining its previous guidance of a full-year adjusted operating profit of £2.7bn-£3bn. For its 2025 financial year, it made £3.1bn.
More good news
However, Tesco’s closest rival has also issued a positive update.
During the 16 weeks to 21 June, J Sainsbury (LSE:SBRY) reported a 4.7% increase in like-for-like sales (excluding fuel). Its Taste the Difference range performed particularly well with an increase of 18%.
On a 12-week rolling basis, it was the 30th successive period of growth in customer numbers. Having gone up over the past three years, market share was also at its highest since 2016.
| Period / GB market share | Tesco | J Sainsbury |
|---|---|---|
| 16 weeks to 15.6.25 | 28.1 | 15.2 |
| 16 weeks to 16.6.24 | 27.6 | 15.1 |
| 16 weeks to 18.6.23 | 27.0 | 14.7 |
But the increase in employer’s National Insurance and the National Living Wage will add around £140m to the supermarket’s costs this year. As a result, the grocer’s decided to retain its previous guidance of a largely unchanged retail profit of around £1bn.
Due to the failure of an “all-out” price war to materialise, Aarin Chikerie, an analyst at Hargreaves Lansdown, reckons this is on the conservative side. However, I think this could still happen. In March, Asda revealed it had a “war chest” to help fund price cuts.
But Chikerie believes there could be “positive surprises for investors who are willing to be patient”.
No regrets
I think that’s the key to supermarket shares. Invest for the long term and forget about them. They’re unlikely to deliver big earnings surprises (in one direction or another). This tends to make their share prices less volatile and – let’s be honest — a little boring. But sometimes, slow and steady wins the race.
Looking back five years, since June 2020, Tesco’s share price has risen 75%. Over the period, this makes it the 32nd-best-performer on the FTSE 100. With a 39% increase, Sainsbury’s places 51st. Again, evidence of a solid (if unspectacular) performance.
But don’t forget about the dividends. Although there are no guarantees, Tesco’s yielding a respectable 3.4%. However, Sainsbury’s is offering a more impressive 4.8%.
To be honest, I find little to choose between the two. But if I’m pushed, I’d pick Tesco. It appears to be gaining market share a little bit quicker than its rival. And that’s fortunate given that I already have the stock in my ISA.
Having said that, I’d be content if its smaller rival was in my portfolio. It really does come down to fine margins. However, in the interests of diversification, I don’t want to own two UK grocers at the same time. But investors looking for steady and reliable performers could consider adding either to their holdings.
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James Beard has positions in Tesco Plc. The Motley Fool UK has recommended J Sainsbury Plc and Tesco Plc. 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.
