Of the London-listed supermarket chains, J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) feels like the safest pair of hands for any income-seeking investment.
The UK-focused grocer came out at the top of the pack in the latest round of full-year reporting last month, with vibrant results in comparison with the carnage reported by the likes of Tesco and Morrison’s.
Strong track record
People often trot out lines such as “past performance is no indicator of future performance” and “history is bunk, it’s the future that counts”, which I agree with to some extent. However, looking at a company’s achievements has some merit as a gauge of form. In the case of Sainsbury, the firm has a tradition of executing its business well. Whatever the firm is doing to attract and retain customers works, going by the figures:
| Year to March | 2010 | 2011 | 2012 | 2013 | 2014 |
|---|---|---|---|---|---|
| Revenue (£m) | 19,964 | 21,102 | 22,294 | 23,303 | 23,949 |
| Net cash from operations (£m) | 1,006 | 854 | 1,067 | 981 | 939 |
| Adjusted earnings per share | 23.9p | 26.5p | 28.1p | 30.8p | 32.8p |
| Dividend per share | 14.2p | 15.1p | 16.1p | 16.7p | 17.3p |
Growth remains steady and well rounded, with cash-flow expansion supporting top and bottom line advances. In the year ending March 2014, Sainsbury delivered underlying sales up 2.8%, like-for-like sales up 0.2% and underlying earnings per share up 6.5%. Crucially, and unlike its peers, Sainsbury maintained its market share in the period despite a tough retail environment, which is where I think the firm’s form really shines through, giving investors reassurance for the future.
Growth opportunities
In the face of escalating gains from big discounters, most traditional big supermarket chains in Britain are struggling to maintain existing market share, let alone to grow. Sainsbury seems strikingly different and does not yet show evidence of any customer-loyalty collapse.
The firm seems well ahead with developing complementary, high-growth sales channels alongside its traditional big-store supermarket business. During the year, 91 new Sainsbury convenience stores joined the estate taking the total beyond 600, a figure that means the firm now has more convenience stores than large supermarkets. Meanwhile, groceries online sales breached the £1 billion barrier as they grew by more than 12% during the year. There’s also a general merchandise website offering own-brand and branded products in the areas of home, garden, appliances, technology, toys, sports and leisure.
Sainsbury is evolving to tackle the changing market place and, judging by its stellar past record of business execution, I think the firm is capable of prevailing in the long term.
Valuation
At a share price of 326p, the forward P/E rating is running at about 11 for year to March 2016. City analysts reckon Sainsbury could suffer a 7% earnings’ decline this year followed by a flat performance the year after that. The forward dividend yield comes in at 5.2% to March 2016 and earnings will cover around that payout 1.75 times if the forecasts are correct.
