Sainsbury Supermarket Shares: Safe Income?
Sainsbury Shares Look Like a Safe Source of Income
High Yield Shares for a Safe Income
After a five year long bull market in UK (and US) equities it could be a good time to review our investment portfolios. We have just had (or possibly missed) one of the best stock-market rallies in living memory; from the panic induced lows during the credit crisis to the recent "Santa Rally" the FTSE has gained over 100% (ignoring dividends) and has been close to all time highs. Not all shares, however, enjoyed such huge returns and if they were cheap during the post Lehman Brothers crash, they are still far from expensive now. UK supermarkets look reasonably priced and shares in J Sainsbury (LSE: SBRY) have been left behind by the market and still represent good value for money with a decent dividend yield of well over 5% i.e. Possibly a good value investment. Although the ongoing price war between the UK supermarkets as customers move either to low-cost alternatives such as Aldi and Lidl or upmarket to Waitrose and Marks and Spencer is putting pressure on profits for the big middle-ground supermarkets such as Sainsbury and Tesco.
Disclaimer: Information in this and other linked articles is unregulated and for general information only and is not intended to be relied upon in making specific investment decisions. Appropriate independent advice should be obtained before making any such decision.
The Business and Competition
Sainsbury is the UK’s third largest retailer after Tesco (LSE: TSCO) and Asda (part of U.S. based Wal-Mart) and in direct competition with Morrison (LSE: MRW) With a market capitalisation of about Â£6,000m, double that of Morrison, Sainsbury is still dwarfed by Tesco. Sainsbury’s main business is food retail, which may be hit by a drop in food price inflation (and price-wars with other supermarkets), but its non-food sales are growing faster and could be what drive future growth of the company. The competition, however, also has plans to grow and while Sainsbury’s EPS growth has been good the current and predicted revenue growth of some of its direct rivals look better.
Investing for High Yield
Sainsbury Share Price Performance
The Sainsbury share-price, over the last year has been poor, compared to other shares in the FTSE 100 index, although other similar supermarkets have also been hit. The current price of 322 is down 13% over the last year and down far more from the peaks of a few months ago. While not a proponent of technical analysis, I did notice that plotting Sainsburys against the market and its supermarket rivals highlighted the apparently low correlation of this share, this is backed up by its low Beta of 0.58 and therefore probable low risk (although Morrison and Tesco have similarly low Beta). If the FTSE goes up Sainsbury may not follow, but if it were to go down the same could also be true, potentially reducing the risk of owning this share.
The Fundamentals: SBRY
The P/E ratio for Sainsbury of 8.5 is a lot lower than Tesco (24), but the PEG ratio of 1.8 for Sainsbury implies that it's shares are perhaps still quite expensive when taking its growth rate into consideration. The dividend cover is good at about 2x making the dividend quite secure and the yield is a very respectable 5.4% (Tesco paid 5.1%) and the dividends have tended to be fairly consistent, growing in most recent years, making this perhaps the most attractive share in this group if you are seeking income.
What Might Happen Next?
Well, there probably isn't going to be another 100% UK stock-market rally from here and possibly even a dip in prices, but the shares that got left behind, which still have respectable dividends, like J Sainsbury, should outperform the market. Interest rates and taxes will rise at some point, possibly hitting consumer spending, but we all still need to eat so Sainsbury profits should hold up nicely.
Sainsbury is not one of the highest yielding shares in the FTSE100, but pays more than it's direct rivals. Add to this the occasional rumours of takeover bids from oil-rich Qataris and there could still be room for extra growth. Obviously takeover rumours are little use to an investor if they never come to fruition, but they can be quite fun in the medium term: buy when the dust settles, then wait for the next rumour, banking the dividends in the mean-time. Sainsbury hasn't had a great year in 2014 so far, but should be a fairly safe bet for 2010 and a good source of dividend income, especially considering the depressed level of supermarket shares at the moment.