Want to know the biggest lesson I learned from Tescos results this week? Its that the troubles are far from over for the FTSE 100 supermarket giants, and that now could be the best opportunity to sell for some time. Lets look at the other big two:
J Sainsbury (LSE: SBRY)(NASDAQOTH: JSAIY.US) has prided itself on selling slightly better stuff than its main rivals, aiming at a more upmarket segment. But have you seen the latest Lidl ads, clearly targeting the bistro and organic market crowd? Theyre good ads and its good produce. And anyone who thinks slightly better-off people will continue to pay premium prices if they can get the same good stuff cheaper is surely mistaken.
Sainsburys itself clearly doesnt think so, and is is being forced into the price-cutting battle and the subsequent need to cut costs is putting a squeeze on while its upstart rivals are expanding rapidly.
WM Morrison (LSE: MRW)(NASDAQOTH: MRWSY.US), on the other hand, has always been seen as addressing the bargain-end of the market, and thats really where the battle is hardest. Morrisons has been woefully late getting its online shopping up and running, and has lagged the rest in the multi-format stores race too. Sure, theres an 8% recovery in earnings forecast for the year to January 2016 followed by a further 19% the next year, but thats after a 60% fall over the past two years.
And while Morrisons EPS growth prediction is at least better than the falls expected at Sainsburys, both are looking too optimistic to me, at least with a long-term view.
For both, were still looking at around 50% off annual earnings being paid out as dividends, and thats even after Morrisons has been cut. And I just dont see that payout ratio as being sustainable for long at a time when the sector is pursuing a strategy of price-wars and cost-cutting. Weve already seen the result at Tesco, whose dividend has been slashed to almost zero, and I would not be banking on taking 3% to 4% per year from the other two for very long.
Sell on the bounce?
The shares themselves have recovered of late, although all three look like theyre starting to dip again. Sainsburys is up 18% since mid-October to 267p, with Morrisons up 28% over a similar period to 193p. I can see both of them ending the year lower, and I reckon now could turn out to be a pretty good time to sell.
Can you do better than Sainsbury or Morrison over the long term? I think you can, if you follow a simply approach that can bring great long-term rewards.
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.