Hunker Down With J Sainsbury plc For The Supermarket Price War

J Sainsbury plc (LON: SBRY) looks to be best positioned to ride out a supermarket price war but Wm. Morrison Supermarkets plc (LON: MRW) will struggle.

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First Tesco reported sliding sales, Morrisons (LSE: MRW) (NASDAQOTH: MRWSY.US) followed and now finally, J Sainsbury  (LSE:SBRY) (NASDAQOTH: JSAIY.US), after nearly a decade of sales growth, has become the latest UK grocer to report a fall in sales.

Unfortunately, with sales at all three of the UK’s largest food retailers on the slide, many within the industry believe that a cut-throat price war between the three is about to begin. Indeed, Morrisons’ has already started, announcing £1bn worth of price cuts alongside full-year results. Tesco also has a smaller, £200m drive to cut prices  in place.

With these three retail giants fighting it out for customer cash, Sainsbury’s looks to be in the best position to ride out the storm. 

sainsbury'sRelatively good results

As already mentioned, like its peers Morrisons and Tesco, Sainsbury’s reported that during the fourth quarter of 2013, sales from stores open at least a year fell by a worse than expected 3.1% excluding fuel.

However, Sainsbury’s actually maintained its share of the market at 17%, while the company’s peers lost market share to discount retailers. What’s more, Sainsbury’s management offered an explanation for the drop in sales, noting that last year’s comparable fourth-quarter results were stronger, as the grocer benefited from the horsemeat scandal and an early Mother’s Day.

Further, Sainsbury’s convenience store sales jumped 15% during 2013 and the company is rumoured to working on developing a mobile network with Vodafone.

Juicy dividend

Sainsbury’s most attractive quality however, is the company’s dividend payout, which at present looks to be safe based on the above sales data.

Sainsbury’s currently offers a 5.4% dividend yield, which is forecast to rise to 5.6% next year. This payout is covered approximately twice by earnings and current City forecasts predict that Sainsbury’s income will push marginally higher during 2015, supporting the dividend payout.

In comparison, Sainsbury’s peer Morrisons currently offers a dividend yield of 6.1%, forecast to hit 6.3% next year. However, While Morrisons’ management has stated its commitment to the dividend payout for the next year or two, with earnings falling it is possible that Morrisons’ payout could be cut before the end of the decade. 

Foolish Summary

So, as a price war within the UK grocery market takes hold, Sainsbury’s appears to be in the best position to ride out a storm and investors should benefit. Indeed, Sainsbury’s is maintaining market share, increasing its presence around the UK and the company offers an extremely attractive dividend yield, well covered by earnings.

Lastly, Qatar Holdings still owns around 26% of Sainsbury’s and after the recent slump in the company’s share price, I would not rule out an opportunistic takeover attempt from Qatar. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert owns shares in Tesco and Morrisons. The Motley Fool owns shares in Tesco and has recommended shares in Morrisons.

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