You might have noticed that I picked up some more Sainsburys SBRY shares on Monday 16th November at 242p for my Income Portfolio - so they now make up about 10% of the Income Portfolio exposure.
I had been weighing up whether or not to buy more SBRY for a while and was sort of dithering because obviously the Sector faces some challenges at the moment. However, my Decision was forced a bit because I wanted to buy more Shares in something following the Terrorist Attacks in Paris on Friday 13th November - because if everyone Sells when the Market re-opens after the Weekend then we are letting them scare us and surrender to their vile intentions.
It’s probably a bit strong to call it a ‘Bull Case’ - in reality, it is more a ‘Tortoise Case’ or something like that because there is no way I am expecting fireworks here - especially not in the Short Term anyway. In summary, my buying reasons are as follows:
- Dividend around 4.7% Next Year and this is likely to slowly increase over time as SBRY gets itself sorted out in coming years - this is a nice level for my Income Portfolio. The Dividend got chopped last year and it seems likely that is it sustainable now as the business gets back on an even keel.
- Holding a Food Retailer (Grocer) in my Income Portfolio which only holds 12 Stocks is a good diversifier and SBRY has some defensive attributes. OK, it has suffered a lot in recent years but that is the past and I think the future from now looks a lot more pretty.
- SBRY didn’t get quite so aggressive with its expansion plans in the boom years compared to Tesco TSCO and as a result has manageable Debt levels and owns the leases on many of its Stores - this makes it the standout Grocer in my view. I also read today that SBRY was the only Grocer to grow its Market Share in the last quarter.
- SBRY seems to have a Market Position which puts it in a differentiated niche compared to the Stores like Morrisons, Tesco, Asda which all seem to be competing for similar customers. SBRY appeals to a more Middle Class customer and is just below Waitrose and Marks & Spencer - this seems to insulate it a little from the onslaught of the ultra Low-Cost operators, Aldi and Lidl.
- At the moment all I ever read on the Grocery Sector is about how Aldi and Lidl are killing the larger Groups and that they are all doomed. This is nonsense - as ever, it is purely lazy journalism and misses out some important factors. The incumbent Players have a huge Barrier to Entry in the form of Physical Store locations - for instance, I have a Tesco 5 minutes from my House and this means that I mostly shop in Tesco, even though I might prefer other Stores really. Aldi and Lidl are growing very fast but it is from a Low Base and at some point the Planning Laws etc. will slow them up. Another element is that there seems to be a general assumption that the Larger Groups are pretty stupid and are just going to sit there and let the Low Cost boys steal their Supper - it’s not going to happen, the Large Groups are already fighting back and this will make a big difference. In terms of Market Share, here are the figures from 2014 which appear in this week’s Investors Chronicle (13 November - 19 November 2015, page 7 at the bottom): Tesco 29% (down 2% since 2009), Asda 17% (stayed the same), Sainsbury 17% (up 1% since 2009), Aldi 5% (up 3%), Lidl 3% (up 1%) - then Morrisons (11%) and the others shared out the rest.
- SBRY put out Interim Results on Wednesday 11th November 2015 and they seem to have stabilised. It was notable that their Clothing Range was doing well and the Convenience Stores seem to be growing. Obviously there are loads of challenges but overall things are on the mend. They have been putting a lot of effort into Product Quality and say they are on track to improve the quality of 3,000 own-brand products - an area where SBRY had a clear Market lead many years ago. You can read the Interim Results here:
- The likes of SBRY and TSCO have advantages over the Discounters arising from their wider ranges - they may have to compete on ‘Staple’ items in terms of pricing but for many Lines they have no such problem.
- New Online arrivals like Amazon Pantry could provide more competition - however, as yet Amazon is limited in its range and SBRY probably loses money on its Internet Shopping anyway !!
- For many years there have been rumours that SBRY might get bid for - usually from the Qatari Sovereign Wealth Fund I think - it’s a remote chance but you never know, it might actually happen. As ever, you should never buy a Stock simply for a Takeover - the Value Case must stack up anyway and then a Takeover is a Brucie Bonus.
- SBRY goes Ex-Div on Thursday 19th November for 4p a Share - so in effect I have bought SBRY 4p lower than my Buy Price as it is only a couple of days away.
- Come on, you have to admit they have the best Xmas Advert with that Cat thing (John Lewis? Pah !!)
- Sentiment towards the Sector is negative and this is likely to remain the case for some time especially because Morrisons MRW and Tesco TSCO look to be limping along in terms of their Business Models, this will probably drag on SBRY as well.
- Even in the best of times Food Retail is a pretty dull sector - for an Income Portfolio like mine it makes a lot of sense I reckon (diversity) but as a Stock for a more exciting Trading Account it probably is a bit tedious. However, with a clear Range on the Charts there could be a bit of ‘In & Out’ for Short Termers - and we all like a bit of In & Out.
- SBRY Growth areas like Convenience Stores and Clothing are very competitive and it is very possible that they disappoint on these in the future.
- As with all Stocks, if Interest Rates rise fast then this would hit SBRY in a couple of ways - firstly it would raise SBRY debt servicing costs and also hit Property Values of its Stores but secondly it would probably hit its Value as an Income Portfolio Share - Investors would want a higher Dividend Yield if overall Interest Rates in the Economy were higher. A higher Dividend yield would mean the Share Price must fall.
- Christmas is a critical Trading Period for any Retailer - the first update on trading usually comes out in January and if this disappoints then the Shares will get whacked.
- In theory Food Retailers are supposed to be quite immune to Economic Recessions as people still have to eat and all that. However, the depth of the last Recession following the Credit Crunch was a key factor in driving Customers to the likes of Lidl and Aldi and it seems likely that another Recession might mean more of the same. In the past, people didn’t bother going to the Low Cost chaps but once the Recession motivated them to try it out, they were pleasantly surprised. Conversely, if we have good Economic Times, then maybe the opposite effect will occur and people may start to shun the Low Cost stores.
- Deflation has been a big problem for Food Retailers recently and if this continues it will make life hard for SBRY etc. This is especially the case with the ‘Living’ Wage coming in and therefore Staff Costs likely to rise. With Oil prices low, I guess deflation in Food could continue as it costs much less to fuel the Tractor !!
Valuation and Target
Please look at the ShareScope screenshot below which shows the ‘Details’ screen as it looked to me on the evening of Sunday 15th November 2015. If you look in the Top Right Hand corner, you might see ‘Norm EPS (p)’ for ‘Mar 2017 Forecast’ of 23.38p. At my Buy Price of 242p, this gives a Forward P/E (Price divided by Earnings) Ratio of 10.4 (242p divided by 23.38p) - this strikes me as pretty good value (obviously this assumes that Consensus Broker Forecasts are about right - but if anything there must be scope for SBRY to beat these figures).
In terms of the Dividend, the expected Payout for next year is 11.421p which means a Forward Dividend Yield of 4.7% on my Buy Price of 242p.
Note: I always work out these P/E and Divvy Yield figures myself using the numbers provided. Never trust printed P/E and Divvy and PEG figures etc. Always get your calculator out.
Because I hold this in my Income Portfolio and I am mainly after a steady Dividend Stream year in, year out, I am not overly focused on a Target Price to sell at. However, I would think that the recent highs around 400p must be possible in a couple of years with a lot of patience. I told you this was not an exciting Investment !!
The Chart below shows something like a 20 year view for SBRY - the standout for me here is that it has really been in a huge Range - with the Floor down around 220p and the Ceiling up around 600p. What is really attractive for me now is that it is down on the Floor - this will not have escaped the notice of the majority of Stockmarket Observers.
In this case, we start off with an Uptrend Channel which I have marked with the 2 Parallel Green Lines (and I have stuck a handy Green Arrow to point at it); and then it goes into a Downtrend Channel which I have marked with the Parallel Red Lines (and Red Arrow); and then we get the current Phase which is a Sideways Range which I have marked with the Blue Lines and Blue Arrow.
Note: This kind of Chart Pattern is followed by nearly every Stock - if you want more Returns and less Risk then don’t buy in the Downtrend bit and when it breaks up out of the Sideways Range, buy loads more.
Right, that’s the spiel on SBRY, WD