On Wednesday last week, J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) and Tesco both released their latest trading statements.
This head-to-head contest had a clear winner: Sainsbury. The headline statistics were impressive — total sales (excluding fuel) up 4.6%, versus 1.7% for Tesco, and like-for-like sales up 2.0% excluding fuel, compared with just 1.0% for Tesco.
Sainsbury’s online sales were significant, too, growing by 15% (Tesco: 13%) during the quarter, so that online orders now account for more than £1bn in annual sales.
These statistics are notable, and made me wonder if I have been too bearish on Sainsbury recently.
Sainsbury’s share price has risen by 16% so far this year, but its 4.5% prospective yield remains higher than that of Tesco (4.2%) and is covered by earnings 1.8 times, giving a fairly healthy safety margin.
What’s more, whereas Tesco’s dividend growth has stalled over the last couple of years, Sainsbury’s dividend has grown by 10.6% since 2011, and is expected to rise by 4.2% this year, providing investors with an income that has kept pace with inflation.
Pricing & profitability
For me, one of the biggest question marks over Sainsbury has been the combination of its below-average operating margin, and the widespread perception — which I shared — that it is slightly more expensive than Tesco and Morrisons.
Sainsbury’s sales growth suggests that customers don’t find it too expensive, and although we’ll have to wait until November to see the firm’s latest profit figures, I’m beginning to think that Sainsbury’s margins are no longer a major concern, either.
Last year, Sainsbury’s operating margin was 3.8%, while Tesco, despite claiming a ‘trading margin’ of 5.3%, actually delivered an operating margin of just 3.4%, once the £572m cost of its Clubcard scheme was subtracted from its operating profits.
Morrison’s operating margin dropped from 5.2% to 4.3% during the first half of this year, and I wouldn’t be surprised to see it fall further, as it fights to compete on price while it rolls out its chain of ‘M’ local convenience stores.
I’m bullish on Sainsbury
For me, it all adds up to one thing — Sainsbury looks an attractive buy at present, and although its forecast P/E of 12.3 places it at a slight premium to Tesco and Morrison, I reckon it definitely deserves a closer look if you are planning to add some supermarket shares to your portfolio.
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> Roland owns shares in Tesco but does not own shares in any of the other companies mentioned in this article. The Motley Fool owns shares in Tesco.