The Tesco (LSE:TSCO) share price is currently £3.89, while shares in Lloyds Banking Group (LSE:LLOY) trade at less than 63p. So someone with £100 to invest has a decision to make.
Obviously, other stocks are worth considering, but for the same amount of cash that it takes to buy 26 shares in Tesco, an investor could buy 159 Lloyds shares. So is the decision a no-brainer?
Not so fast
Unfortunately not. While £100 buys a lot more Lloyds shares than Tesco’s, there are a couple of reasons why the investment equation isn’t quite as straightforward as this.
The first is there are around 60bn Lloyds shares in the world, compared to just under 7bn Tesco shares. That means £100 actually buys a larger stake in the retailer than in the bank. There’s definitely something satisfying about owning a large number of shares in a firm. But investors need to keep in mind that the total number of shares also matters.
So is it better for an investor to consider owning a smaller part of Lloyds than a larger part of Tesco? A lot of the answer comes down to how the businesses are going to perform over the long term.
Similarities
Despite operating in very different industries, the businesses actually have some important things in common. In both cases, their size and scale gives them an advantage over competitors.
For Tesco, having more stores than its rivals gives the supermarket more buying power. And this puts it in a stronger position when it comes to negotiating terms with manufacturers and suppliers.
With Lloyds, its scale allows it to attract more consumer deposits than other banks. This gives it an advantage when it comes to financing the loans it makes to customers in the form of mortgages.
Whether it’s banking or retailing, size can be a big advantage for a business. But there are also some important differences that investors should pay attention to when it comes to Lloyds and Tesco.
Differences
One of the biggest differences is stability. The amount of food and cleaning products people buy doesn’t tend to change whether the economy’s growing or contracting.
As a result, Tesco tends to benefit from relatively stable demand even in more difficult economic conditions. Lloyds however, doesn’t – demand for loans can fall sharply when interest rates rise.
This makes the chance of interest rates being lower over the long term a risk with investing in the bank. But it doesn’t automatically mean the supermarket’s a better choice.
Banking comes with much higher barriers to entry than retailing, which is a risk for Tesco. And the likes of Aldi and Lidl arguably provide much more competition than other banks do for Lloyds.
Which stock should investors consider buying?
Given the difference in sensitivity to interest rates, I think the most important thing for investors is their view of future macroeconomic growth. This isn’t easy, but it’s crucial.
For those who are confident in the underlying economy, Lloyds shares could be worth a closer look. But for anyone who’s less sure, considering the stability of Tesco might be a more attractive proposition to consider.
This post was originally published on Motley Fool
