The Motley Fool

Could the Sainsbury’s share price ruin your Stocks and Shares ISA?

From the infamous moment that J Sainsbury (LON: SBRY) boss Mike Coupe was caught singing “we’re in the money ” while waiting for a TV interview, his goal of merging the supermarket he runs with Walmart-owned Asda seemed to start slipping from his grasp. And so it has proved with the Competition and Markets Authority blocking the deal on the grounds of reduced customer choice and likely higher prices. With the merger having been called off, what shape is Sainsbury’s now in as a business and investment prospect? Could it drive your Stocks and Shares ISA to new heights or leave it generating even lower returns than a Cash ISA?

The results paint a picture

The simple answer to that question is: not good. The full-year results showed that despite acquiring Argos in 2016, the group only just managed to increase its overall sales by a fairly measly 2.1%. But the bigger problem was the falls in profit before tax and earnings per share. The former fell by a massive 29%, the latter by 32%.

Claim your FREE copy of The Motley Fool’s Bear Market Survival Guide.

Global stock markets may be reeling from the coronavirus, but you don’t have to face this down market alone. Help yourself to a FREE copy of The Motley Fool’s Bear Market Survival Guide and discover the five steps you can take right now to try and bolster your portfolio… including how you can aim to turn today’s market uncertainty to your advantage. Click here to claim your FREE copy now!

The results paint a pretty bleak picture to me of a company that is in poor shape and was desperate to acquire growth and market share through a major acquisition or merger. That is not a recipe anyone should embrace. Indeed, rightly or wrongly, it reminds me of the desperate antics of Carillion trying to buy Balfour Beatty not that long before it collapsed. I’m not saying the same thing will happen at Sainsbury’s, but the company does have some parallels – huge debt, reliance on acquisitions for growth and a high and growing dividend despite a poorly performing business.

Debt

Addressing debt first of all, it is seven times greater than pre-tax profit which for me is uncomfortably high. Management recognises the issue and has an aim of reducing debt by £600m over the next three years. This is a good first step, but the level for me is still a concern.  

Acquisition growth?

Although there was praise for the Argos acquisition at the time, nearly three years later, the question has to be asked: was it worth it? In the final results, Sainsbury’s, did not separate Argos’s financial contribution to the group and instead focused on synergies and its presence in Sainsbury’s stores. I think investors deserve a little more detail than that, given £1.4bn was spent on acquiring the business. 

The dividend

Then there is the dividend. It may be tempting to want to grab shares in a company yielding over 5%. However, with profit before tax plummeting, it is hard to see the sustainability in increasing the dividend and unless the underlying business improves, a future cut to the dividend looks likely to me. It happened to Tesco in recent memory and it could happen to Sainsbury’s too.

Even with the share price at its lowest in a decade, I would not be tempted to buy into Sainsbury’s. To me it looks like a value trap, and one that I’m keen not to fall into.

There’s a ‘double agent’ hiding in the FTSE… we recommend you buy it!

Don’t miss our special stock presentation.

It contains details of a UK-listed company our Motley Fool UK analysts are extremely enthusiastic about.

They think it’s offering an incredible opportunity to grow your wealth over the long term – at its current price – regardless of what happens in the wider market.

That’s why they’re referring to it as the FTSE’s ‘double agent’.

Because they believe it’s working both with the market… And against it.

To find out why we think you should add it to your portfolio today…

Click here to read our presentation.

Andy Ross 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.