I often ask myself why anyone would consider buying J Sainsbury (LSE: SBRY) for even a second, given that there appears to be so little going for it.
Earnings growth is predicted to remain meagre at best, rises of just 1% and 4% being predicted for the years to March 2019 and 2020 respectively.
The Big Four supermarket isn’t even that cheap either. A forward P/E ratio of 15.3 times sits just outside the widely-regarded value benchmark of 15 times or below. I would be seeking a figure much lower than this given its colossal risk profile that threatens to blow medium-term profit forecasts from City brokers off course.
Dividend yields aren’t enough to offset the grocer’s high risk profile either, certainly not for me. Sure, yields of 3.4% for this year and 3.5% for fiscal 2019 may smash inflation by some distance, the UK consumer price index registering at 2.7% in August. But bigger yields can be found on the FTSE 100 and for much less risk, for example RSA Insurance, ITV and Legal & General to name just a few.
What’s more, I am of the opinion that even these dividend forecasts could be in danger of disappointing given the firm’s ongoing revenues travails and its colossal debt pile.
Don’t expect vast returns
If you’re a glass-half-full investor banking on Sainsbury’s to prove you with handsome income streams by the time you come to retire, I believe you may well be setting yourself up for a fall.
I’m sceptical of the earnings outlook for all of the country’s established supermarkets as the German discounters increase their market share. Cash-strapped shoppers continue to head to these new operators in their droves and their aggressive expansion programme across the UK is drawing more and more food customers away from the traditional chains.
Sainsbury’s understood the allure of the value chains and it tried to emulate the successes of Aldi and Lidl through its doomed joint venture with cut-price chain Netto a few years back. The same fate could well befall Tesco’s new low-cost venture Jacks, which was formally launched last week. But for the moment this new operation by J Sainsbury’s Footsie rival adds another layer of pressure.
Don’t bank on M&A
Sainsbury’s isn’t sitting on its hands, though, and recent M&A action is in theory to be applauded.
The takeover of Argos parent Home Retail Group in 2016 gave it the opportunity to diversify away from the increasingly-competitive groceries market, and the added benefit of opening Argos outlets in existing supermarkets in theory gave shoppers another reason to head there instead of to a competitor. It hasn’t had the game-changing impact that Sainsbury’s had hoped for, however, at least not yet.
It’s hoping now that by merging with Asda it will have the clout to negotiate with suppliers more effectively and will thus be able to compete better with the cheaper chains. This is by no means guaranteed, of course. And that’s assuming that the proposed deal can get the approval of the competition watchdog in the first place.
Right now there appears to be more downside with Sainsbury’s than upside. I wouldn’t bank on it to provide brilliant returns by the time you come to retire.