J Sainsbury (LSE:SBRY) was one of the original members of the FTSE 100 when it was launched in January 1984. And while the retailer may no longer be the UK’s largest grocer – it lost its crown to Tesco in 1995 – it comfortably remains in second place.
However, after the group announced (23 April) its results for the 52 weeks ended 28 February (FY26), investors appeared disappointed and sent its share price 3.7% lower. It also led to a number of City brokers reassessing their price targets and revisiting their ratings for the stock.
As is often the case, opinion’s divided but, generally speaking, the brokers were less favourable to the stock after crunching their way through the numbers.
For shareholders like me, this is obviously disappointing. However, I’m not selling. Here’s why.
| Broker | Previous rating | New rating | Previous price target (pence) | New price target (pence) |
|---|---|---|---|---|
| Jefferies | Hold | Hold | 310 | 310 |
| Goldman Sachs | Buy | Sell | 390 | 335 |
| Citi | Buy | Neutral | 377 | 335 |
| Deutsche Bank | Buy | Buy | 360 | 365 |
What’s going on?
At first glance, the reaction of investors and brokers is a little puzzling. After all, the headlines from the results were as follows:
- Retail revenue increased 4.3% year-on-year to £30bn.
- Grocery sales rose 5.2%.
- Retail underlying operating profit fell 1.1% to £1bn (a deliberate decision was made not to pass on cost increases to customers).
- Retail free cash flow improved by 8.1% to £600m.
- Net debt fell £100m to £5.8bn.
- Annual dividend hiked by 0.7% to 13.7p.
- £300m share buyback programme announced.
But what appeared to spook the City was the grocer’s outlook. Why?
Increased uncertainty
Although the group reported a “positive” start to the new financial year with grocery volume growth ahead of the market, it said the “conflict in the Middle East will impact both our customers and our business”.
Describing the consequences as “very uncertain”, it’s expecting to deliver underlying operating profit of £975m-£1.075bn in FY27. It’s a wide range so it’s hard to know what to make of the numbers.
The group’s expecting retail free cash flow of “more than” £500m. Given what’s going on in the world at the moment, this doesn’t seem too bad to me. But I’m aware of the challenges facing the group.
As well as events in the Gulf, the performance of its Argos arm remains a concern. It continues to under-perform the wider group and could be something of a distraction for management.
Also, the UK grocery market remains one of the most competitive around with tight margins and heavy discounting.
But the recent pull back in the retailer’s share price and the modest increase in its dividend has pushed its yield higher. New investors could avail of a 4.2% return (no guarantees, of course).
What am I doing?
The publication of results is often a time when shareholders reflect. I’m no different. And after doing this, I’ve decided to keep hold of my shares. Why?
Importantly, the group’s shown that it’s able to cope with the threat of the German discounters Aldi and Lidl, better than some of its rivals. And then there’s its impressive dividend.
Admittedly, its share price is unlikely to go gangbusters but the stock’s defensive properties could be ideal for the uncertain times in which we live.
Personally, I’m going to keep Sainsbury’s in my Stocks and Shares ISA and I believe investors could consider adding it to their own portfolios.
