Sainsbury Supermarket Shares: Safe Income?

Sainsbury is the UK's third largest retailer after Tesco (LSE: TSCO) and Asda (part of U.S. based Wal-Mart) and in direct competition with Morrison (LSE: MRW) With a market capitalisation of about £6,000m, double that of Morrison, Sainsbury is still dwarfed by Tesco. Sainsbury's main business is food retail, which may be hit by a drop in food price inflation, but its non-food sales are growing faster and could be what drive future growth of the company. The competition, however, also has plans to grow and while Sainsbury's EPS growth has been good at 13% the current and predicted revenue growth of its direct rivals look better. Sainsbury's third quarter figures will be released on Thursday 7th January 2010 and are expected to show good like-for-like sales growth over the Christmas period, but this will have been a good season for all supermarkets.

The Sainsbury share-price, over the last year has done little more than just wiggle up and down a bit. The current price of 323.7 is down 4% over the last year, with not eve n a little excitement at the imminent arrival of Santa, whereas Tesco and the FTSE100 have rocketed upwards over the last few months. While not a proponent of technical analysis, I did notice that plotting Sainsburys against the market and its supermarket rivals highlighted the apparently low correlation of this share, this is backed up by its low Beta of 0.44 and therefore probable low risk (although Morrison and Tesco have similarly low Beta). If the FTSE goes up Sainsbury may not follow, but if it were to go down the same could also be true, potentially reducing the risk of owning this share.

The P/E ratio for Sainsbury of 16.6 is a little higher than Tesco (15.4) and lower than Morrison (17.4), but the PEG ratio of 1.1 for Sainsbury implies that it's shares are fair-value when taking its growth rate into consideration. The dividend cover is comparatively low at just 1.3 versus 2.3 and 3.0, making the dividend less secure than it's rivals, but the yield is a very respectable 4.14% forecast to rise to 4.5% (Tesco and Morrison paid just 2.8% and 2.1%) and the dividends have tended to be fairly consistent, growing in most recent years, making this the most attractive share in this group if you are seeking income.

Well, there probably isn't going to be another 50% UK stock-market rally from here and possibly even a dip in prices, but the shares that got left behind, which still have respectable dividends, like J Sainsbury, should outperform the market. Interest rates and taxes will rise at some point, possibly hitting consumer spending, but we all still need to eat so Sainsbury profits should hold up nicely.

Sainsbury is not one of the highest yielding shares in the FTSE100, but pays more than it's direct rivals. Add to this the occasional rumours of takeover bids from oil-rich Qataris and there could still be room for extra growth. Obviously takeover rumours are little use to an investor if they never come to fruition, but they can be quite fun in the medium term: buy when the dust settles, then wait for the next rumour, banking the dividends in the mean-time. Sainsbury didn't have a great year in 2009, but should be a good safe bet for 2010 and a good source of dividend income.

Update: July 2011 Sainsbury shares are now trading at around 325 having moved up then drifted back down again as the UK austerity measures started to bite (i.e. tax increases and public job losses particularly affecting middle income families), but have continued to pay out good dividends. At current PE ratio of about 9.5 and yield of more than 4.5% they still seem like a good value investment and continued speculation about possible takeover makes them even more interesting.