An investment in FTSE 100 supermarket group J Sainsbury (LSE: SBRY) should be boringly predictable. And it should generate modest but consistent returns. But sadly, the shares have consistently failed to deliver.
Things now seem set to get worse. The Sainsbury’s share price was down by 15% at the time of writing, after the market watchdog raised serious concerns about the group’s planned merger with Asda.
Today, I’ll explain what the news means and why I’d rather shop elsewhere.
“Shoppers could face higher prices”
Sainsbury’s argument in favour of the merger is that it will generate big costs savings, which would be passed onto customers. Although the cost savings seem realistic to me, the Competition and Markets Authority (CMA) is not convinced customers would benefit.
In preliminary findings published today, the CMA said a merger “could lead to a substantial lessening of competition.” The body, which carried out the investigation, found that “shoppers could face higher prices, reduced quality and choice, and a poorer overall shopping experience.”
It gets worse. The CMA’s provisional conclusion is that it’s likely to block the deal, or to require the two companies to sell off “a significant number of stores… potentially including one of the Sainsbury’s or Asda brands.”
The inquiry group also flagged up a particular risk that “prices could rise at a large number of their petrol stations.” It cited 132 locations where Sainsbury’s and Asda petrol stations overlap.
In short, the CMA said “it is likely to be difficult for the companies to address the concerns it has identified.”
Is the merger off?
The CMA findings sound sensible (and obvious) to me. In my opinion, the only people likely to benefit from a ‘Sainsda’ merger would be boardroom bosses and shareholders, not customers.
OK, this merger isn’t dead yet, but I suspect the two supermarkets will now scrap this plan.
If I’m right, then Sainsbury’s shareholders will have to face the realities of investing in a company that generated an operating margin of just 1.3% during the 12 months to 22 September.
Sainsbury’s share price has fallen by 28% in five years and its dividend has been cut three times since 2013. This business isn’t generating value for shareholders and I don’t think this is likely to change. I’d stay away.
Here’s one I’d buy
A defensive stock should be consistent, profitable and have some kind of advantage over rivals. Sainsbury’s lacks these qualities, in my opinion. But one defensive consumer stock I would like to own is soft drinks group Britvic (LSE: BVIC), which owns brands such as Robinsons, Fruit Shoot and J2O.
Since December 2005, Britvic shares have risen by 273%. Over the same 13-year period, Sainsbury’s has fallen 6%.
Why the big difference? Britvic’s brand names give it a loyal customer base and decent pricing power. Last year saw both sales and pre-tax profit rise by 5%. The dividend rose by 6.4% and the group’s operating profit margin was stable at 11%.
Unlike Sainsbury’s, Britvic is able to generate real returns for shareholders, over and above the cost of funding its business.
Shares in this FTSE 250 stock aren’t especially cheap, on 15 times earnings and with a 3.3% yield. Despite this, I’d be happy to buy Britvic today. I’m confident this business will continue to generate positive returns for its shareholders.
Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Britvic. 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.