Is Sainsbury’s worth its heavily discounted share price?

Poor old Sainsbury’s. Its share price is currently lower than at any time over the last 25 years and appears to be in free-fall.

But how can this be? Surely Sainsbury’s is a defensive dividend payer with a long record of unbroken dividend payments and a core supermarket business which is about as dependable as they come?

Well, perhaps not. The big UK supermarkets have had problems ever since the financial crisis made consumers far more cost conscious than they were before. The market effectively fell into the laps of Aldi and Lidl, and Sainsbury’s has been playing catch up ever since.

To build greater economies of scale, Sainsbury’s proposed a merger with ASDA in 2018 and the market briefly became optimistic about the company’s prospects. But that deal was eventually blocked by the Competition and Markets authority and Sainsbury’s shares are now about 40% below where they were last summer.

As a dividend-focused value investor that sort of decline sparks my interest, so in this month’s Master Investor magazine I decided to look at whether Sainsbury’s is finally good value or not.

Author: John Kingham

I cover both the theory and practice of investing in high-quality UK dividend stocks for long-term income and growth.

13 thoughts on “Is Sainsbury’s worth its heavily discounted share price?”

  1. Hi John,

    I would say the huge retail estate Sainsbury occupies is the albatross around its neck. As an investor, if you think purely about sales per sq ft and expense per sq ft Amazon completely floors Sainsbury’s. Aldi and Lidl beat Sainsbury’s because they focus on core products allowing them to achieve a greater scale of economy. This allows them to price goods lower but still make the same profit as Sainsbury’s.

    If you look at the return on equity from the tangible asset for Sainsburys it went from 8% in 2002 to 4.9% in 2018 its a clear sign Sainsbury’s was skating on thin ice 17 years ago.

    1. Hi Reg, exactly. Even my wife has finally bitten the bullet and started shopping in Aldi for specific items. The price difference is just too big to ignore.

      1. Hi John,

        I think the fundamental issue is the capital intensive nature of retail stores. I would recommend you watch the following clip an interview Jeff Bezos gave in 1999 :

        https://youtu.be/GltlJO56S1g

        At 3.46 notice he does a price comparison between the cost efficiency of Amazon infrastructure and Wal-Mart. This was back in 1999 it clearly shows Sainsbury’s management being sleep at the wheel if Bezos was obsessing about this back in 1999.

        Personally, if I was CEO of Sainsbury’s I would shrink the business and focus on convenience format! Yes take a huge hit but Sainsbury does still have the ability to climb out of this mess.

        The reason is simple thanks to Sainsbury’s size it can buy branded FMCG products at a lower price compared to an independent business or any other large company.

        In addition in a convenience store, people are more willing to pay a higher price due to the convenience factor.

        By literally squeezing more produce in a smaller retail space effectively you achieve higher returns on equity which is essential for the business.

        I think I made comments of a similar nature last year:

        https://www.ukvalueinvestor.com/2018/05/sainsbury-asda-merger.html/

        I think if Sainsbury’s fails to follow through with such drastic measure the company could find itself in limbo and the stock price being stuck.

      2. Hi Reg

        Bezos is right. There’s just no comparison between online and offline overheads, not to mention crazy taxes like Business Rates which effectively nudge companies out of the high street which is the opposite of what MPs say they want.

        As for a quick game of ‘fantasy CEO’, if I were in charge I would either go upmarket and compete with Waitrose (as M&S seems to want to do) where customers will pay higher prices for a nice store, or downmarket and focus purely on low costs and maximum efficiency. It’s the middle ground of Tesco and Sainsbury’s which is being bashed. Or another option is have two Sainsbury’s, a premium Sainsbury’s for upmarket and a discount Sainsbury’s at the other end, probably with quite different branding. That would be more difficult to pull off though, although having two completely separate businesses might make it easier (and share HR, HQ and purchasing power for efficiency, etc.).

        Either way, it’s a job for someone who likes a challenge…

      3. Hello, thank you for this article.
        I agree that Sainsbury’s seems to be going nowhere…

        I like your fantasy CEO suggestions! 🙂
        If I was playing “fantasy CEO”, I would pivot a large portion of the company and thus begin the evolution into new industries.

        I might cut the dividend by 60% (saving £100m in cash) and invest that into Research and Development and exploring pivot options.

        Then, after 1 year of R&D, exploring and analysing pivot options, I would sell off 5% of the worst performing supermarkets, which would bring in about £500m cash and invest around £100m of this into the best pivot option. I would invest £200m into promising value dividend stocks, as suggested by the UK value investor 😉 and with the remaining £200m, I would leave as cash for paying back liabilities and holdin for backup plans.

        I don’t know if that would work… but it’s fun to imagine.

        Nokia started as pulp mill in Finland 150 years ago… Sainsburys could reinvent themselves as something else.

      4. Hi Charlie, some interesting ideas there! As a shareholder I would generally not be pleased with a major pivot. I generally think that established companies should stick to their long-established core competencies, and if they can’t make a decent return doing that then they should gradually liquidate themselves and return the proceeds to investors.

        In the real world that almost never happens because most CEOs don’t want to liquidate themselves out of a job!

      5. Ah yes, liquidation makes sense from an investors POV, but I agree, there’s probably not many CEOs that would be excited to do that!

  2. I like your analysis point of looking at growth in capital employed; but given the rampant abuse of share buybacks in the US, i fear it is meaningless, applied to the larger US companies.

    1. Hi Kiers, my position on buybacks is that they’re fine as long as the price paid for the shares was attractive, i.e. offers an expected return north of 10%. If management don’t think they can get that sort of return from buybacks (or capex) then funds should be returned to investors as dividends instead.

  3. John, on the positive side the home brand tomato and 3 bean soup is excellent. Sainsbury as an investment?
    Sainsbury’s best days are long behind it and given that the industry in the UK has undergone structural change, some of it’s ills are out of it’s hands. Even so it is poorly managed and Mike Coupe is the reason for that.

    All disembark, the train terminates here !

    LR

  4. Hi John,

    Personally, I think Sainsbury would actually benefit from private ownership from a company like Berkshire Hatheway. The reason is simple Sainsbury has built up a great brand and a supply chain. It would cost double for a new company to enter the market because it would have to establish all this infrastructure that Sainsbury has created over the last few decades.

    What Sainsbury needs is an astute boss who understands the most efficient manner of allocating capital and has a patient owner because it’s going to take at least a few years to deliver results. This can be done look at Waterstone it was taken over by a Russian investor who hired the owner of Duant bookstore and this has worked out very well.

    However, as an individual investor, you have little power on how a company is operated, which is why avoiding these companies is the best thing.

    1. 2% margins John! – let the PE or Buffet’s boys take the risk. OK it has a brand, but as we have discussed in the past, the value of brands can decline as well as increase and it has been that way for many of late. Also you can have good and bad managers in public or private entities – when compensation packages are adversely skewed against the long term growth/health of the company/shareholders, the results are similar.

      Point me to a company with 20% margins and a decent (limited) amount of debt and a modicum of growth — OK they might be more expensive, but not all of them.

      LR

      1. Not necessarily LR,

        A significant portion of the goods sold is actually funded on credit i.e. they pay the manufacturer after a time frame. Due to the fast turnover of goods the suppliers are in fact providing capital to Sainsbury’s to run the business free of charge.

        This means we need to focus on the returns the asset itself generates if Sainsbury’s focused on metrics like increasing sales per sq foot, then the size of the company can be reduced and with that the cost of operating the business.

        Underneath all that excess the core Sainsbury’s business is profitable and is being dragged down by the excess baggage. However, if this was carved away it would mean defeat and failure to deliver on the part of management. This is the reason why I suggested that it could be turned around by a private equity firm or a holding company like Berkshire which has patient capital. For an individual investor its a big no-no.

        I think with an astute management team it is possible to turn Sainsbury’s around within 6 to 7 years. However current management is not the best. Clear evidence of this is the proposal to merge with ASDA which has been blocked.

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