A few years ago, the rise of the supermarkets seemed unstoppable. The share prices of companies such as Tesco (LSE: TSCO), Morrisons (LSE: MRW) and Sainsbury (LSE: SBRY) were rocketing skyward.
This was the reflection of a trend that had lasted many decades: a trend away from corner shops, department stores and the high street and towards the supermarkets. The supermarket seemed to represent the ideal combination of choice, value and convenience.
Welcome to the world of the long tail
In a way, the rise of the supermarkets reflected the post-war growth in car ownership and in household wealth. This was the age when bigger was better, when retailers piled it high and sold it cheap.
But, in this century, the emerging trend has been the world of the long tail. This is a world where the weekly visit to the local supermarket has turned into a seamless retail experience, from the supermarket, the city-centre minimart, the computer website, and the tablet and smartphone app. This is a world of almost endless choice, where there are so many competitors that to win a supermarket has to offer an exceptional shopping experience. Pile it high and sell it cheap is so last century.
Hit by this flurry of competition and cultural and technological change, the supermarkets have not known quite how to react. And their share prices have taken a tumble.
From a high of 490p in 2007, Tesco’s share price has fallen to a low of 243p recently. From a high of 326p in 2011, Morrison’s share price is now down to 177p. Likewise, Sainsbury has fallen from 410p to 306p. Investing in the supermarkets at the moment seems to be like trying to catch a falling knife.
But the supermarkets now look cheap
But, wait a minute. Amidst all this doom and gloom, let’s take a snapshot of where the supermarkets stand now, in terms of fundamentals. Tesco is on a P/E ratio of 10.5, with a dividend yield of 5.9. Morrisons is on a P/E ratio 13.8, with a dividend yield of 7.6%. And Sainsbury is on a P/E ratio of 10.5, with a dividend yield of 5.7%.
These supermarkets, particularly Tesco and Sainsbury, now look cheap. And what is particularly noticeable are the stonking dividend yields. These companies are no longer the growth plays they used to be. But they have turned into what may soon be the ideal dividend play. Of the three, my pick at the moment would be Tesco.
So, have the supermarkets bottomed yet? Well, I am biding my time, checking my watchlist, and waiting for the right moment. Turnaround and income plays are not things you rush into but, at these prices, I am seriously interested in buying.