Forget the Sainsbury’s share price, I’d buy this FTSE 250 income stock

With headwinds against the company growing, it’s time to sell Sainsbury’s plc (LON: SBRY) and seek safety in this FTSE 250 (INDEXFTSE: MCX) income stock, says Rupert Hargreaves.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Coworkers standing near a wall

Image source: Getty Images

The last time I covered the J Sainsbury (LSE: SBRY) share price, I advised investors to turn their backs on the retailer following a dismal Christmas trading update.

I continue to hold this opinion. The company’s outlook hasn’t improved over the past few weeks, and it now looks very likely that Sainsbury’s proposed takeover of peer ASDA, will not get the green light from regulators without substantial changes.

Blocked deal? 

Earlier this month, the Competition and Markets Authority extended its investigation into the deal citing the “scope and complexity” of the investigation. The authority needs more time to digest and analyse the issues raised by competitors, as well as with the two key companies. 

If the deal isn’t approved, it’s difficult to see what the future holds for Sainsbury’s. It’s more than likely the company will continue to chug along at its current pace, which implies another year or more of lacklustre growth. At the same time, its domestic competitors, notably Tesco at Morrisons, are roaring ahead, grabbing market share from floundering Sainsbury’s. 

With such an uncertain outlook, I don’t think it’s worth paying the current price of 13.8 times forward earnings for the retailer’s shares.

Slow and steady income 

Sainsbury’s is not for me, but one company I’m interested in is Safestore Holdings (LSE: SAFE)

Safestore’s growth is exploding thanks to the UK’s insatiable demand for storing stuff. The company can’t build properties fast enough. It has 119 wholly-owned stores across the UK and 27 in Paris. On top of this, the group has three new sites in the UK under development and two new locations in the French capital, which are on schedule to open in 2019 and 2020.

Customers are filling up these storage facilities almost as fast as the group can build them. According to Safestore’s first quarter trading update for the three months to the end of January, the company increased its maximum lettable area by 1.6% year-on-year, and its closing occupancy rose 2.2% to 72.2%. 

These numbers indicate customers are opening new accounts with the group at a faster rate than it can build out new storage facilities. 

On a like-for-like basis, occupancy rose 3.2% to 37.5%, and the average storage rate increased by 2.4% to £26.44. Overall, like-for-like revenue expanded 6.4% year-on-year during the first fiscal quarter of its 2019 financial year. 

More of the same

With over two decades of operating history behind it, I’m confident that Safestore is pursuing the right growth strategy and, as the group continue to expand, shareholders should be well rewarded. 

The company has already increased its dividend by 160% over the past six years and analysts are expecting further growth of 13% for 2019, which gives a dividend yield of 3%. 

Another attractive quality about this business is earnings should be relatively immune to any economic disruption that comes as a result of Brexit. The company could even see an increase in demand for its services if things get really bad, because homeowners who have to sell their homes, and shop owners who are forced out of business, might need somewhere to store their possessions while the economy recovers. 

Considering all of the above, I think Safestore is an excellent income stock to include in your portfolio today.

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 considered so you should consider taking independent financial advice.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Black woman using loudspeaker to be heard
Investing Articles

GSK shares plummet 15% in a week! What’s going on here?

GSK shares had a bad time last week. They're down 15% as investors' sentiment soured ahead of litigation proceedings in…

Read more »

Burst your bubble thumbtack and balloon background
Investing Articles

Stock market recovery: have all the bubbles now burst?

Asset bubbles keep on coming, and here's what I'm doing to navigate through them and invest for the stock market…

Read more »

Shot of an young Indian businesswoman sitting alone in the office at night and using a digital tablet
Investing Articles

How I’d invest £290 a month in UK shares for a passive income that beats the State Pension

UK shares can offer a lucrative path for passive income. Our writer considers a plan to double his State Pension.

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

3 of the best shares to buy now with £2,000

I reckon the best shares to buy now have strong growth in earnings and recent good news flow, such as…

Read more »

Young female analyst working at her desk in the office
Investing Articles

How I’m aiming for £500 a month in income from dividend stocks 

Here's my three-step plan for achieving a growing income from dividend stocks and three companies I'd use to help execute…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

UK shares are cheap! So why is Warren Buffett ignoring them and should you too?

Many British shares are trading cheaply and pay dividends. This is normally the hunting ground for Warren Buffett, yet he's…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

How I’ve increased my passive income by 600%

Finding the right opportunities can bring spectacular results. Here’s how our author has managed to increase his monthly passive income…

Read more »

Blue NIO sports car in Oslo showroom
Investing Articles

Could lithium shares make my Stocks and Shares ISA a goldmine?

Our writer is considering buying lithium shares for his Stocks and Shares ISA. Here, he outlines the decision process he…

Read more »