It shouldn’t have come as too much of a surprise, as we’d been hearing disapproving noises for some time, with the CMA’s provisional findings back in February having suggested that the merger would have resulted in raised prices. The shares crashed by 19% that day, so the 6% drop this Thursday was just finalising the disappointment.
Sainsbury’s shares are now trading at levels last seen in the early 1990s, so are we looking at a good investment now? I say no, and I’ll tell you why.
P/E multiples of 11 to 12 forecast for the next few years might not look too demanding, especially as the long-term FTSE 100 average is around the 14 level. And twice-covered dividends yielding more than 4% would usually have me sitting up and taking notice.
But those valuations are based on low single-digit EPS growth expectations (just about on a par with inflation), and looking back at the longer trend makes for worrying reading. In the four years to March 2018, Sainsbury’s earnings per share fell by 38%.
While the recent picture at Morrisons (LSE: MRW) looks better, with expected earnings per share for the year to January 2020 expected to make it back above 2013’s level, we only need to go back a year to 2012 and we’re looking at a 67% fall — even if the mooted 34% EPS recovery indicated for the current year comes off.
The Morrisons dividend isn’t anything to get excited about either. Having been slashed in 2017 to 5p per share, from 13.65p the previous year, it’s starting to creep back up again. But forecast yields are still only at 3% this year and 3.3% next, with similar cover by earnings as Sainsbury’s dividends at around two times.
I’m not in any way tempted by 3% dividends from Morrisons, not in a year when the FTSE 100 as a whole is expected to yield 4.7% — and that’s better than the Sainsbury’s yield too.
The Morrisons share price has had a better run, with an 11% gain over the past five years, a little ahead of the Footsie’s 9%. But that puts the shares on a higher-than-average P/E of over 16, and I don’t see the justification for that.
The obvious reason for the struggles facing Sainsbury’s and Morrisons these days is competition, as anyone who has ever shopped at Lidl or Aldi will tell you. And that is surely only going to intensify in the coming years.
Of the two, I see Morrisons offering better value for investors, placing itself as it does squarely in the price competition arena.
Any differentiation Sainsbury might have once enjoyed as a slightly upmarket offering has been eroded these days. And what market there still is for that segment is being assailed by Marks & Spencer and its smaller Simply Food outlets offering selected ranges.
The bottom line for me is that I see no need whatsoever to put any money into such a cut-throat competitive sector with less and less differentiation other than on price every year. Not when the FTSE 100 is overflowing with far more attractive shares.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.