It’s almost 11 months since I wrote about supermarket chain J Sainsbury (LSE: SBRY). Back then, the shares were riding high after the firm had announced its intention to combine its business with Walmart’s Asda.
However, we now know the deal is off — at least for the time being — because the Competition and Markets Authority (CMA) thinks it’s bad for consumers. And the stock market didn’t like that. The share price has plummeted more than 30% since its August peak. But with the forward-looking dividend yield now nudging 4.5%, should you load up with the stock?
A changing sector
I must admit, that kind of dividend income looks tempting to me. And there was a time not so long ago when many investors considered the London-listed supermarket sector as defensive and cash-generating. Indeed, the supermarket chains were seen by many as ideal businesses for backing up dividend-led investments.
But all that changed over recent years when the supermarkets revealed their vulnerability. They are, after all, low-margin commodity-style enterprises with little to differentiate the services of one chain from another. My view is that the entire sector is in the process of being disrupted by a new breed of super-discounting outlets, led by the likes of Aldi and Lidl. But there are other competitors too, and we only have to look at how much the old chains such as Sainsbury’s, Morrisons and Tesco have been struggling, and it’s easy to reach the conclusion that the good times may never return.
Indeed, I reckon the desperate attempt to tie up Sainsbury’s and Asda is all about the struggle to survive in a changing market. Even for the current trading year to March 2020, City analysts predict earnings for Sainsbury’s will fall well short of the levels achieved back in 2013 and 2014. Forget growth, I reckon. The best we can hope for is some kind of turnaround or recovery in Sainsbury’s business. But I fear the years ahead may deliver a managed decline instead.
A second shot at the prize
However, Sainsbury’s and Asda haven’t given up on their attempt to merge. In a statement posted on 19 March, Sainsbury’s said it submitted to the CMA a detailed case to argue for the tie-up, which proposes remedies to the concerns expressed by the authority. One possible investing strategy could be to buy some of Sainsbury’s shares now in the hope that the deal with Asda will eventually go through. If that happens, the shares could shoot up again, as they did before when the proposals were announced. While you’re waiting, you could collect the dividend.
However, I’m not keen to do that because if the deal’s rejected a second time, I reckon the share price could go even lower. And I’m not keen to make Sainsbury’s a long-term hold in my portfolio.
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Kevin Godbold has no position in any 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.