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Smart Investor: is Sainsbury's king of the supermarkets?
Against a tough retail backdrop Sainsbury's has managed to increase sales while its rivals have struggled. Time to stock up on the shares?
The past couple of years have proved difficult for the supermarket sector. A challenging UK economy, which has offered little or no growth, has spawned an increasingly savvy and ruthless consumer who rigidly focuses on price and value.
The result has been margin contraction, a reduction in capital expenditure and (the old analyst's favourite) a decline in like-for-like sales.
However, FTSE 100-listed Sainsbury (SBRY.L), led by chief executive Justin King, has managed to deliver positive like-for-like sales throughout the past few years; in this week's interim results statement it reported a 1.7% rise in like-for-like sales.
This has mainly been because of a successful ‘brand match’ offer, where Sainsbury's checks the prices of leading brands against its main rivals and, should they be more expensive, gives the customer a voucher to use next time they shop.
Although this marketing tactic has proved popular thus far, is Sainsbury's an attractive investment opportunity?
The company started life supplying own-brand products from its store in Drury Lane in 1869. Since then, it has been the first supermarket to offer self-service tills, the first to computerise distribution and the first to sell Fairtrade food.
Today, Sainsbury's trades out of more than 1,000 stores (including 440 convenience stores), employs more than 150,000 people, and operates a bank and various property joint ventures.
With a market capitalisation of £6.5 billion, Sainsbury is the 51st-largest company in the FTSE 100.
In terms of performance, the past five years have been fairly impressive, with Sainsbury's making a net profit in each year. However, in spite of net profit increasing at an annualised rate of 13% over the period, it has flatlined over the past three years, with 2012’s £598 million just £13 million more than in 2010.
Of course, given the difficult trading conditions this is still impressive, although an average return on equity (ROE) of 9.5% over the past five years, hitting 10.6% last year, is less so. Such ROE levels are acceptable, but nothing more.
Meanwhile, Sainsbury's currently yields 4.6% from a payout ratio of 51%, making shares relatively attractive for income seekers. Sainsbury is in the top-20 highest-yielding stocks in the FTSE 100 and, furthermore, dividends per share have increased in each of the past five years; increasing at an annualised rate of 10.6%.
In terms of viability, a debt-to-equity ratio of 49% is moderate, and means that interest cover is fairly comfortable at 5.7. Of course, the supermarket sector has had a rough ride in recent years, with consumers spending less and demanding more. The result has been margin contraction and a slowdown in the rate of store building.
The Citywire guide to investment trusts
In association with Aberdeen Asset Management
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