J Sainsbury (LSE: SBRY) has been dominating the headlines in recent sessions as speculation of fresh M&A acquisition in the grocery sector has risen.
With Tesco aiming to snap up Booker Group to bolster its position in both the convenience and ‘out of home’ markets, rumours emerged late last week that Sainsbury’s was about to strike back by launching a bid for Nisa.
Such a move would make sense for the London-based chain, the addition of Nisa’s 2,500-plus local stores providing its revenues outlook with a serious shot in the arm. The convenience and online sectors remain the only avenues of growth as shoppers fall increasingly out of love with the established operators’ raft of megastores.
Still, the rising competition across the grocery segment means that Sainsbury’s still faces an uphill battle to generate revenues growth, regardless of any Nisa tie-up. The rapid expansion of Aldi and Lidl has already put Sainsbury’s et al under significant strain, causing it to suffer three consecutive earnings falls.
And the shockwaves coursing through the industry intensified last week following news that Amazon will buy Whole Foods for $13.7bn. As well as boosting the ranges offered by its online operations, the move will significantly improve the internet giant’s supply chain and give it a substantial bricks-and-mortar presence.
Too risky?
Sainsbury’s has been engaged in a multi-year price war against competitors new and old to stop its sales dropping off the edge. And the business will have to keep this strategy going as rising inflation bolsters the allure of the discounters with cost-conscious Britons.
This, along with a rising cost base, is expected to cause profits at Sainsbury’s to fall once again in the year to March 2018, a 6% reversal currently anticipated. And as a result the City predicts a fourth consecutive cut in the dividend, this time to 10p per share from 10.2p.
Many investors may still be tempted in by a 4% yield, a figure that beats the broader FTSE 100 broad average of 3.5%. But I reckon the immense structural challenges Sainsbury’s faces could see profits, and thus dividends, continue to spin lower for some time to come.
Loaded with trouble
Expectations of sinking spending power in the UK should also encourage investors to steer clear of Next (LSE: NXT), in my opinion. City brokers expect the clothing colossus to endure some earnings pressure in the near-term, a 9% dip is forecast for the 12 months to January 2018.
Despite this, Next is still expected to raise the ordinary dividend to 160.8p per share from 158p last year. Consequently the stock carries a 4% dividend yield.
While Next has also vowed to continue returning cash to its shareholders through special dividends, I would still not be tempted in at the present time.
Rising competition on the high street have made Next’s sales slow considerably over the past couple of years, while its Next Directory online arm has also lost its edge as the rest of the high street has got its act together in cyberspace. And the till troubles at the firm are likely to rise as crimped consumer spending power force the business to cut prices to head off the likes of H&M and Associated British Foods’ Primark chain.
I reckon Next’s murky long-term outlook should encourage dividend hunters to shop elsewhere.