MENU

Why I’d Sell J Sainsbury Plc, Tesco Plc & WM Morrison Supermarkets Plc, But Buy Booker Group Plc

When I look at the UK listed grocers, I get a shudder down my spine.  I can’t help but think about the onslaught from the likes of Aldi and Lidl squeezing from the bottom, and pressure from Waitrose and Marks and Spencer from the top.

Combine that with the current price war being witnessed across the UK and the the latest grocery share figures from Kantar Worldpanel — published yesterday for the 12 weeks ending 29 March 2015, showing that Aldi has become Britain’s sixth largest supermarket (with its sales rising nearly 17%) — and you could, perhaps understand my concern.  Let’s take a closer look at three of the big six:

J Sainsbury

Currently positioned at number 3 with over 16% of the market, J Sainsbury (LSE: SBRY) is still a force to be reckoned with.  However, take one look at its share price performance over the last year and it is easy to spot that this company, along with others, is finding trading tough. 

It’s not all bad news, however, as it returned to growth in this period for the first time since August 2014.  It brought in more shoppers, and has grown sales — albeit by just 0.2% — and as a result has slowed the rate at which it is losing market share – down just 0.1% to 16.4%.  Whether these are the green shoots of a recovery remains to be seen. Personally, I’d be waiting for the next report to see whether this was an emerging trend or a one-off.

Tesco

It would be fairly easy to look back at the last 12 months in the history of Tesco (LSE: TSCO), but the market looks forward.  Some may be surprised that the shares have not underperformed as much as they may have expected.

It seems the market is optimistic about the new CEO, ‘Drastic’ Dave Lewis, and his plan to take the company forward.  According to the figures, Tesco is still the #1 supermarket, boasting a 28.4% share of the market.  Whilst it is true that the company should be able to leverage this position, I still think that it has a long way to go to getting the whole group on track — with the shares trading on 23 times forecast earnings, there seems to be plenty of optimism in the price.

WM Morrison

It could be argued that Morrisons (LSE: MRW) was one of the first of the big six to show signs that business was tough — the shares, however, have only slightly underperformed the main index, possibly due to the arrival of the new CEO David Potts, combined with further proposed cost savings and a rebased dividend.

Personally, I think that there is plenty of hard work ahead for the team, with the figures showing that sales slipped a further 0.7%, giving the company a market share of 10.9%. In my view, the management have their work cut out, and they seem to agree.  This was the opening sentence in the chairman’s statement:

“Last year’s trading environment was tough, and we don’t expect any change this year”

Unfortunately, neither do I.

Booker Group

The final company from the consumer defensive sector that I’m looking at today is Booker Group (LSE: BOK).  The company’s share price seems to have fallen in sympathy with the supermarkets’, and the shares have slightly underperformed the index.

However, in its Q4 trading update, total sales (including Makro) increased by 1.5%, whilst Booker’s like-for-like sales (excluding Makro) increased by 2.3%.  To achieve figures like these in a competitive, deflationary environment is commendable — I believe that there is more to come as Booker continues to rebrand the Makro stores.  I was also impressed with the tone of the CEO’s comments on the year:

“This was a good end to a good year.  We achieved strong customer satisfaction scores, and sales and profits were the best we have ever achieved.  The integration of Makro into the Group has gone smoothly which has allowed us to improve choice, prices and service to our catering and retail customers.  Despite price deflation, we have grown like for like sales and Booker Group remains on track to Focus, Drive and Broaden the business to be the UK’s leading wholesaler.”

Combining these factors with net cash of around £147 million, a forecast 3.5% yield and a possible further capital distribution later this year leaves me a little less worried than normal that the shares trade on 22 times forecast earnings. Having said that, sometimes you should pay up for quality, whilst the dividends keep me warm at night.

If, like me, you are an investor with an eye on income and would like some help building your portfolio, or if you would like some further information containing The Motley Fool's very own Mark Rogers' Five Golden Rules for Building a Dividend Portfolio, then I can highly recommend this special free report entitled: "How To Create Dividends For Life"

This report will show you how to tailor your portfolio, allowing you to 'dividend and conquer' -- and lay the foundations of a more dependable, income-focused portfolio.  It's currently FREE and comes without obligation.  So, sit back in your favourite chair, click here and enjoy!

Dave Sullivan owns shares in Booker. The Motley Fool UK has recommended Booker. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.