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Ten iconic UK shares: J Sainsbury

The last in our series of articles using fundamental analysis to examine the prospects of 10 iconic FTSE companies.

A person outside a Sainsbury's branch
Source: Bloomberg

Reasons to watch

  1. Possible cut to the full-year dividend
  2. Ongoing reductions in store opening programme
  3. Potential for price war with Tesco

History

Sainsbury's goes back to 1869, when it began in central London as a single store. The store emphasised the quality aspects, with marble counters and uniforms of white aprons for staff. By 1922 it had become the UK’s largest grocery group, with 128 stores by the time founder died in 1928.

The firm was a pioneer of self-service stores, after the chairman visited the USA in 1956. It led the way in new, larger supermarkets, beginning the revolution in UK shopping that transformed the sector.

Diversification came along in 1979 when it formed a joint venture with a Belgian firm to create the Homebase DIY chain, which it eventually sold in 2000 for almost £1 billion.

The 1990s were a difficult time, as Sainsbury’s failed to capitalise on the emergence of loyalty cards and the increasing importance of non-food retailing, meaning that it lost ground to Tesco. Eventually, it ceded its place as the market leader to Tesco, in 1996, a situation that continues to this day.

A relaunch in the late 1990s has led to a revival of the brand, as the firm positioned itself as an upmarket alternative to Tesco. Since then Sainsbury’s position has stablised, although the entrance of new German budget supermarkets has put the overall sector under pressure, while a change to more frequent, smaller shopping trips calls the viability of big supermarkets into question.

Fundamental analysis*

The supermarket has reported a £290 million pre-tax loss, with a warning that sales in supermarkets in the UK will fall in coming years. In addition, it plans to cut back on store openings, with 40 such new stores scrubbed.

Underlying pre-tax profits were down 6% to £375 million, while like-for-like sales (the standard industry measure that covers stores open for a year or more) were down 2.1%. Crucially, Sainsbury’s thinks that 25% of its stores have ‘under-utilised space’ and will look to include new concessions in these stores to increase their return on investment and also provide further reasons for customers to visit.

The interim dividend was left at 5p per share, but questions remain over the full-year payout. Given Tesco has cut back its dividend Sainsbury’s may well follow suit, with the reasonable excuse that cash needs to be diverted to other more pressing needs.

As an investment, Sainsbury’s needs to be compared to its main rival, Tesco. Morrisons has, broadly speaking, ceded the battle for the middle ground to these two giants, instead going off to fight for market share with the German discounters. Sainsbury’s and Tesco can co-exist, but market share will be jealously guarded. This is why the former has decided to invest £150 million in lower prices in the next year, as a real price war gets underway.

On a PE of 7, Sainsbury’s is certainly much cheaper than Tesco, which is on a PE of 18. Tesco continues to enjoy wider profit margins, which will give it room to manoeuvre in any price war, but as customer loyalty erodes low prices lose some of their effectiveness. Dividend hunters should regard the Sainsbury’s payout with caution, since a cut is a distinct possibility.

Overall the entire supermarket sector should be regarded as a risky proposition. There are better dividends on offer in other parts of the market, while other companies offer attractive PE ratios without the long-term uncertainty that bedevils the sector.

The first-half results took the shares back to a peak of 282p before dropping back. They found significant resistance at the trendline that runs down from the peak seen in November 2013 at 420p. A drop further will target 240p and then 220p. 

*What is fundamental analysis?

Fundamental analysis seeks to examine a security by measuring its value through the use of financial and qualitative factors. Essentially, fundamental investors believe that each share is a piece of a company, and that the company can be analysed to determine whether the current share price indicates whether the company itself is undervalued (trading at a discount) or overvalued (trading at a premium).

The overall objective is to determine the underlying value of a company, and use comparisons with similar companies to determine if the business is likely to be successful or otherwise. Crucially, a company cannot be overvalued or undervalued in isolation. Instead, fundamental analysis compares a company to its peers in the sector, to the broader market, and to past valuations, to determine whether the current valuations are appropriate. 

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Ten iconic UK shares

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Denne informasjonen er utarbeidet av IG, forretningsnavnet til IG Markets Limited. I tillegg til disclaimeren nedenfor, inneholder ikke denne siden oversikt over kurser, eller tilbud om, eller oppfordring til, en transaksjon i noe finansielt instrument. IG påtar seg intet ansvar for handlinger basert på disse kommentarene og for eventuelle konsekvenser som et resultat av dette. Ingen garanti gis for nøyaktigheten eller fullstendigheten av denne informasjonen. Personer som handler ut i fra denne informasjonen gjør det på egen risiko. Forskning gitt her tar ikke hensyn til spesifikke investeringsmål, finansiell situasjon og behov som angår den enkelte person som mottar dette. Det er ikke utarbeidet i samsvar med lovens krav for å fremme uavhengighet av investeringsanalyse og som sådan er ansett av å være markedsføringskommunikasjon. Selv om vi ikke er hindret i å handle i forkant av våre anbefalinger, ønsker vi ikke å dra nytte av dem før de blir levert til våre kunder.