The Fevertree success story

During the last decade, Fevertree smashed analysts’ forecasts time and time again. A strong product and branding provided the basis for success. Coupled with huge growth in the UK craft spirits market, the company was in the right place at the right time to enjoy huge sales.

Since the highs of 2018, the Fevertree share price has fallen back to around the £24 mark. Why is this, and should investors be braced for a rocky ride? In 2019 Fevertee posted growth of 9.7%. In almost any scenario this would make for happy investors, but the track record since float shows this as comparatively poor performance.

Fevertree – pandemic problems

First-half revenue was down 11% due to the impact of on-trade sales. Bars and restaurants account for 45% of sales, so due to lower revenues and higher costs, Fevertree suffered a 35% fall in profits. Paul Summers looked at this in detail earlier this year.

The dividend was slightly increased to 5.41p, but as this is only a yield of around 0.7%, even reinvesting these dividends would not contribute hugely to investment growth. Potential investors must focus on the case for future sales increases as a reason to purchase the stock.

The future for the Fevertree share price

Even before the Covid-19 pandemic, sales in the UK had begun to fall. It is wise to consider if this is due to the boom period for craft spirits coming to an end. There is a limit to how much Fevertree can sell in the UK, and the data shows that rapid growth is over.

Fevertree must therefore focus on international expansion to grow sales. The US would be the logical market to focus on, but differentials in customer tastes make the situation more complex. The prevalence of dark spirits such as bourbon or rum in the US mean that Fevertree’s portfolio there will depend on products such as cola, rather than tonic water. This market is more crowded and will be difficult to penetrate.

Fevertree share price – an investment case

In my opinion, Fevertree has all the hallmarks of a sound investment case. Founder Tim Warrilow still remains as CEO. This gives good stability and continuity of vision. Businesses such as Superdry have demonstrated in recent years that removing this aspect (in their case, ongoing battles over the role of Julian Dunkerton) has negative impacts on investor confidence.

Fevertree have also demonstrated sound growth in sales, profits, and earnings per share, with dividend increases to boot.

And yet, I won’t be buying in. The price-to-earnings ratio currently sits at 50. Investors in this case are insatiable. Success is expected to be followed with more success. That demand becomes reflected in a very steep asking price. As a general rule of thumb, I like my investments to have a P/E ratio no greater than 20. I still believe Fevertree to be a sound long-term prospect, but would like to see the current price come down before investing.

The post The Fevertree share price. Is it time to buy in? appeared first on The Twelfth Magpie.

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bwatson1 has no position in any of the shares mentioned. The Motley Fool UK has recommended Fevertree Drinks. 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.

In 2008, the financial crisis hit, and the days of wine and roses were over. Figures such as Bob Diamond and Fred Goodwin became targets for public ire, and scandals continued to loom large over the industry in the following decade. Libor manipulation, PPI mis-selling, and interest-rate hedging were all colossal own goals for the sector. Share prices end the decade close to lows for most of its constituents.

2021 – A fresh start for UK bank shares?

There is little doubt that banks will suffer a hangover from the Covid-19 pandemic. The industry will face a prolonged period of rock-bottom interest rates, and there will be significant provision for bad loans required. However, some banks are better placed than others to weather the storm.

Bank of England Governer Andrew Bailey has given an update on banks resuming dividends this week, having previously banned payouts in March. Banks have not had to make provisions for bad debts that were as bad as initially thought. This may free up cash to return to investors and restart dividend payments, albeit under close scruitiny. The challenge for the UK banking sector is to keep a sustainable public image at a time of nationally high unemployment and companies like Debenhams and Arcadia folding. 

Potential investments

Of all the UK bank shares, Barclays gives the soundest investment case, in my opinion. The investment bank has performed well this year, and is trading at a discount to other sector members. One positive outcome of the financial crisis was the stress tests that banks are now forced to conduct. As a result, Barclays are significantly better capitalised now. I also like their plans to provide an alternative to the likes of Hargreaves Lansdown with growth of their Smart Investor app. The bank has seen a 230% growth in customers using this platform in the last year.

Barclays posted a profit before tax of £1.1bn in the third quarter. Comparisons with the previous year are skewed by the bank’s decision to include a £1.6bn PPI charge in the previous financial year, but it does at least show profitability. 

Since the financial crisis, Lloyds is a candidate for being the ultimate ‘jam tomorrow’ UK bank share of the FTSE 100. Investors are always led to think that the share price is finally due to head upwards, then reality sinks in again. Over the past five years, shares are down 46%. As a UK-focused bank, they are far more exposed to our home fortunes than sector rivals. Low interest rates will cap profitability for some time. Jonathan Smith does however give a bullish commentary on their prospects.

Foolish summary

Investing is a game. Admittedly, a game with hard earned cash at stake. But investors can use the same principle as for any other games, and try to find the most potential reward for the least risk. Given that, it is hard to see how investing in UK bank shares is a sound proposition for 2021. I will certainly be avoiding the sector and looking to areas of the market less weighed down by incumbent problems. 

The post UK bank shares – worthy investments for 2021? appeared first on The Twelfth Magpie.

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bwatson1 has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays, HSBC Holdings, and Lloyds Banking Group. 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.

Opening the account, however, is the simple part. Deciding which shares to purchase is a more nuanced decision. This could put first-time investors off. Only 3.3% of the UK population were subscribed to a Stocks and Shares ISA in 2019. However, if you are one of the investors just dipping a toe into the water of UK shares, I recommend looking ahead.

UK shares options

I think it’s best to examine potential investments with long-term success in mind. For me, this means finding companies with good track records of decision-making, and whose future prospects are sound. These may be mature companies, and so are not necessarily primed for explosive growth, but that can generate solid returns over many years.

Companies with this characteristic often operate in markets with high barriers to entry. This discourages new firms from providing competition. An example in UK shares would be Reckitt Benckiser (LSE: RB). A household goods supplier that may not necessarily be a household name. But readers will recognise brands like Dettol, Calgon, Durex, and Nurofen. Strong, trusted brands are a bedrock of long-term success.

Reckitt Benckiser 2020 perfomance

As a hygiene product supplier, Reckitt has enjoyed a strong 2020 performance. Indeed, compared to 2019, sales have increased over 9% during the first three quarters. From the March lows seen across all UK shares, the RB share price rebounded strongly.

The share price has seen a recent fallback, however. This has possibly been driven by succesful vaccine developments. As the pandemic unwinds, logic dictates that demand for cleaning products may fall. But growth among health products and in developing markets leaves Reckitt well primed for future growth. And a reasonable dividend yield of around 2.6% will support capital growth if reinvested through a Stocks and Shares ISA.

Diageo — another strong UK share

Over the upcoming Christmas period, readers may enjoy a stiff drink after the trials of 2020. Fancy a pint of Guinness? Or a small dram of Johnnie Walker whisky? Both are manufactured by Diageo (LSE: DGE), among many other well known brands. Ben Race recently examined the investment case for Diageo.

The closing of pubs and restaurants has impacted demand, with net sales to June 2020 down by 8.7%. Remember though, investments in Stocks and Shares ISA are for the long-term. Diageo’s guidance is to expect an advance in operating profit through to June 2021.

Traditionally, Diageo has seen predictable sales and cash flows, allowing a sustainable dividend of around 2.5%. This has increased steadily over the past five years, with good dividend cover in place. Diageo’s defensive qualities have seen it weather the pandemic, and it is well placed to grow in a post Covid-19 world.

UK shares final thoughts

I think Reckitt Benckiser and Diageo would make two great long-term components of a balanced portfolio with a growth outlook. This is how I go about finding investments for my own Stocks and Shares ISA. By applying the same kind of thinking, Foolish readers can identify UK shares investment candidates for their own Stocks and Shares ISAs.

The post 2 UK shares I’d buy for a Stocks and Shares ISA appeared first on The Twelfth Magpie.

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bwatson1 has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo. 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.

This was my starting point in a search through the FTSE 250. It didn’t take long for me to find a company, which in my opinion makes tasty products.

Domino’s Pizza Group (LSE: DOM) has adjusted to the Covid-19 pandemic as well as can be expected. The recent trading update showed full-year profit to be in line with consensus with a rise in recent sales. A sterling digital performance was further good news for investors. The company has also benefitted from the temporary UK VAT cut. In an interesting parallel with supermarkets, the pandemic has shifted sales more into delivery orders. The costs incurred are higher for deliveries than collections. This detracts from margins.

In my opinion, Domino’s Pizza has characteristics that should be at the forefront of a Foolish investor’s mind. Manika Premsingh examined the investing case in October. It is a resilient, cash generating business, with a strong brand. However, the recent share price trend has been downwards, suggesting investors are wary of future prospects.

Clouds on the horizon

Domino’s Pizza uses a franchise model. Usually investors have much to gain from this position. The income from each store does not have a high degree of cost attached. There is an additional revenue stream from selling equipment and ingredients to franchise owners. However, business growth depends on finding people willing to open new franchises, or expand existing ones. For Domino’s, this is a problem.

Domino’s Pizza — struggling to grow?

Domino’s strategy for growth has been to add new stores within existing franchise territories. This has resulted in more sales to customers, and ingredients to stores. New stores, however, have taken sales from existing franchise owners. Concurrently, disruption from rivals such as Just Eat has increased competition both for sales and delivery staff. CEO Dominic Paul addressed these issues in the latest update. He called for realigning the relationship with franchisee partners by agreeing a sustainable way forward. However, definitive results will take some time. There are limits to international expansion. Domino’s is also currently looking to dispose of loss-making arms in Europe.

Foolish summary

On the surface, Domino’s Pizza looks a good prospective investment case for long-term growth. The advice given by Nick Train certainly holds up well here. Consumer tastes for the product are positive, and the dividend has been reinstated. However, there are long-term, unresolved issues beneath the surface. For now, I will be avoiding the shares.

The post Is Domino’s Pizza a tasty investment for the future? appeared first on The Twelfth Magpie.

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bwatson1 has no position in any of the shares mentioned. The Motley Fool UK has recommended Domino's Pizza. 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.

Centrica share price – the downturn

Since that fateful day, Centrica has unleashed wave after wave of bad news onto shareholders. Numerous complaints about customer service and high prices forewarned an exodus of subscribers, at one point over 100k per month. Weak oil and gas prices accounted for more revenue falls. A struggle to dispose of unwanted assets led to another investor sell-off, and the Centrica share price continued to fall.

For a short while I consoled myself with a generous dividend payment. This was cut in 2015, then suspended entirely amid the Covid-19 pandemic. Centrica was then demoted from the FTSE 100. All said and done, I sit on an 81% loss on Centrica share price capital as I write. This is before considering the opportunity cost of the investment. Had I put my money into Scottish Mortgage Investment Trust in 2010, I would now be rewarded with a staggering 771% growth.

Foolish advice

I write this short confessional to Foolish readers to try and prevent you making the same mistakes as I did. Harvey Jones has told the story of the Centrica share price over the last decade. There were numerous opportuinities to sell my holding each time the bad news arrived, but I was reluctant to crystalise a loss. “Maybe they’ll recover”, I kept telling myself. The harsh lesson I learnt is that there can sometimes be no end to bad news. It is better to cut and run as early as possible.

Centrica share price – the current picture

Lower energy demand from businesses during the first half of 2020 saw revenues falling 14% and operating profits down 9%. An increase in residential demand has partially offset this. However, with homes and businesses suffering from Covid-19-related financial hardship, the group will have to increase provision for deferred payments and bad debts. Encouragingly, cash flow and liquidity remain strong. This puts the group in a good position to navigate the ongoing pandemic.

There are signs that the group is entering a turnaround phase. It is easy to forget that Centrica is still the UK’s biggest household energy supplier, but hasn’t yet fully exploited this position. The simplification of the business coming from offloading exploration and nuclear divisions should bring stability. Restructuring should help increase profit margins over the next two years.

Foolish summary

As new chief executive, Chris O’Shea, gets to grips with a turnaround strategy there could be a case for a value investment. The Centrica share price may see significant upside potential. In my opinion, however, there are better candidates within the FTSE for this kind of investment strategy. As such, I will retain my current holding in the hope of growth and dividend reinstatement, but I certainly will not be adding to it.

The post Tempted by the Centrica share price? Read this first appeared first on The Twelfth Magpie.

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bwatson1 owns shares of Centrica. 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.

The fall in annuity rates over the past decade has made this strategy popular among retirees to supplement pension income. In a steady or growing stock market, investors may look to extract around a 4% yield through reliable dividend stocks such as Royal Dutch Shell, BP, or GlaxoSmithKline.

In 2020, the world has been subjected to the Covid-19 pandemic. Governments and businesses have had to grapple with the impact, often characterised by falling sales and increasing costs. JD Wetherspoon demonstrated the cause and effect of this by recently posting their first loss since 1984. As a result, many companies have less cash available to redistribute to investors, and therefore cut their dividend.

Half of the FTSE 100 constituents have cut or cancelled dividends this year. For income investors this represents a problem, but in such a problem resides an opportunity. Fellow Fool Karl Loomes showed he would pick dividend stocks in the current market earlier this year.

A FTSE 100 candidate

One such dividend stock I would favour is DS Smith (LSE:SMDS). This view is shared by David Barnes who cited the company as an income and growth opportunity. DS Smith has an attribute that is vital in this current climate, and that is resilience. The group has significant exposure to the groceries and consumer goods sector, and these have underpinned revenue while industrial customers have reduced demand.

There are good opportunities for growth as well. An expanding e-commerce sector will require more cardboard boxes, and a long-term cultural shift towards reduction in plastics and a move to sustainable packaging give scope for growth.

Reinstating the dividend

While there is undeniably a cyclical element to DS Smith’s business, I like the fact that they have expanded globally through acquisitions to mitigate this.

Although the group cancelled its interim dividend in April, the most recent update to the market showed management confidence. This was underscored by a promise to return to dividend payments, although no level of payment has yet been given. It is not wise to try to estimate what they may be based on past dividend payments. Crucially though, having survived the initial impact of Covid-19 in a good position, reinstating the dividend should be a sustainable measure. For dividend stocks, sustainability is key to an investing decision.

A secondary upside is the potential for growth in the share price. DS Smith was it hard in April by the market’s reaction to the initial wave of Covid-19 lockdown. The recent announcement of recovering momentum in Europe and North America, combined with strong cost control and cash generation means there is significant recovery potential.

Foolish summary

The Fool ethos of buying and holding quality shares for the long term is never more applicable than for a dividend stock such as DS Smith. Although the share price is down around 25% from its high, I think there is significant recovery potential. This, combined with the return of the dividend, is why I’d consider it a good income investment for my portfolio. 

The post Have £1,000 to invest? I’d buy this FTSE 100 dividend stock appeared first on The Twelfth Magpie.

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Ben Watson has no position in any of the shares mentioned. The Motley Fool UK has recommended DS Smith and GlaxoSmithKline. 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.

Back to 2020. The first three events could perhaps be repeated. But a cash ISA with 5% interest rate? No chance. Around 1.6% would be the best on offer.

So, what’s the alternative? Investing in the stock market. Several UK companies pay a dividend per share owned, and Edward Sheldon examined three leading dividend candidates earlier this month. A different option, however, is the investment trust.

Why investment trusts?

I like the way that investment trusts are structured with an independent board responsible for safeguarding investors’ best interests. Low ongoing charges are usually another key feature, and under current rules they can retain up to 15% of the income that they receive each year, and then use this to sustain dividends in lean years.

Companies that paid large dividends in 2019 have mostly either cut them completely, or vastly reduced them during the Covid-19 pandemic. Crucially, retained capital has allowed investment trusts such as City of London to not only maintain a dividend payment, but increase it for the 54^th year in a row.

Global investment

I love the maxim of Murray International Trust (LSE: MYI), which aims “to achieve an above average dividend yield, with long term growth in dividends and capital ahead of inflation”. This investment trust is currently trading at a small discount, the dividend yield is 5.73%, gained through investing principally in global equities such as Roche and Verizon. Income is paid quarterly, so gives a bedrock for a passive investor.

Managed by Bruce Stout since 2004, the trust has been in existence for over 100 years. Historical performance is strong, but has lagged its benchmark FTSE World over the last few years due to a lack of exposure to tech stocks and a higher than average exposure to the Asia Pacific region. The trust management believe that future dividend and growth opportunities will be found in this market.

UK dominance

For those seeking a stronger UK focus, then Merchants Trust (LSE: MRCH) is worth considering. The share price is substantially down from its high of £5.69, and as a result the yield is an impressive 7.3%. A high exposure to cyclical stock areas such as travel, leisure and aerospace has driven underperformance compared to the wider market. Recent additions to the portfolio have been centered on defensive tobacco stocks via British American Tobacco and Imperial Brands, and telecom stocks (BT and Vodafone). Manager Simon Gergal has committed to a “high and growing yield”, although it remains to be seen if this can be achieved in the current climate. The answer should become clearer as companies begin to reinstate dividends, and given the potential for share price growth as the market recovers post Covid-19, I’m optimistic that Merchants will provide an excellent long term investment.

Although investment trusts can provide yields of 5% plus, it is important to bear in mind that capital is always at risk. Risk can be mitigated through diverse holdings, something that either of these trusts can offer. In my opinion, they would be a good addition to a balanced portfolio.

The post 2 high-yielding investment trusts I’d buy now appeared first on The Twelfth Magpie.

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Ben Watson holds no position in any share mentioned. The Motley Fool UK has recommended Imperial Brands. 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.

Examining the underlying top holdings of the trust, the reason for the gains become clear. Underpinning the portfolio are giants of the tech stock genre. Tesla, Amazon, Netflix and Spotify are all featured in the top 10 holdings ,and have substantially increased in valuation since the low water mark of April this year.

Overall, my thoughts on the trust are positive. There are low annual charges and it is currently trading at a narrow discount. The management philosophy of James Anderson and Tom Slater is ‘the best potential, durable growth opportunities for the future’, an ethos that will chime with many Fool readers. Earlier this year, Paul Summers cited the stock as a long-term holding for retirement.

I would ,however, sound one gentle note of caution. In the case of SMT, the concern is the proportion of total holdings tied up in a relatively narrow spread of tech stocks.

Digging deeper

For any investment trust or fund that I hold, I like to keep abreast of its major components as they can signpost future movements in price. As an early investor into the short-lived Woodford Equity Income fund, I became concerned in 2018 when the top 10 holdings revealed only a singular defensive dividend-paying stock, namely, Imperial Brands. Such stocks should be the bedrock of that fund style, but the remainder were high risk or unquoted companies. As a result, I sold my holding and avoided the later chaos as the Woodford fund was suspended.

Applying this logic to Scottish Mortgage, my concern is that Tesla and Amazon account for 23% of the entire trust. Ultimately, the performance of these companies will hold huge sway over share price movements. This isn’t to say that they won’t continue to grow or that I don’t like the investment as a whole, merely something to be aware of when making decisions.

The Foolish alternative

I like the look of Allianz Technology Trust (LSE: ATT). For those wishing to gain exposure to tech stocks, it contains similar holdings to Scottish Mortgage, but in smaller overall proportions. Edward Sheldon examined its tech stock credentials earlier this year.

Led by its position in tech giant Apple, it has performed strongly against its benchmark index (Dow Jones World Technology) over the longer term, and is well positioned to continue this through its exposure to companies that have benefitted from the coronavirus pandemic shift to home working and increased online activity. The management team looks to invest in potential high-growth mid-cap companies, seeking leaders in sectors that are driving change through innovation or lower costs.

The trust charges both a management and performance fee, but these are offset by strong returns in the years where the performance fee is levied.

Foolish final thoughts

It is clear to me that the tech stock sector will be a huge driver of growth over the next 10 years, and therefore any investor would benefit from some exposure within their portfolio. Either of these two trusts offer that exposure and are well placed to benefit from that growth.

The post Exposure to tech stocks: Scottish Mortgage Investment Trust vs Allianz Technology Trust appeared first on The Twelfth Magpie.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Ben Watson holds no position in any share mentioned. The Motley Fool UK has no position in any stock 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.

This can either be taken as cash (income) or used to buy more shares (reinvestment). Through the magic of compounding, this can grow the value of your initial investment year upon year. My Foolish colleague Peter Stephens wrote a guide to dividend investing earlier this year.

If this is a style of investing that I want to pursue, it is then a case of examining the FTSE 100 to see which companies pay the highest dividends, then using my £1,000 to invest in them, right? No, wrong. I don’t just want to see a high dividend yield; I need to ask a more important question.

Is the dividend sustainable?

A company health check

So, how do I answer the question ‘can the company continue to pay a dividend year upon year?’ I’m looking for a company in good financial health, which has a good record of paying and increasing dividends, and whose future prospects are bright. Applying this logic to the FTSE 100 constituents, Unilever (LSE: ULVR) seem to tick all the boxes. Indeed, earlier this month, Fool writer Rupert Hargreaves saw its shares as a good component of a stocks and shares ISA.

As a consumer goods company, many Foolish readers will be able to locate a Unilever product in their house. From Dove to Domestos, Persil and more, the list of brands under the Unilever umbrella is impressive. A Unilever product is found, on average, in seven out of 10 global homes, and used by 2.5bn people every day. Crucially, the brands aren’t as vulnerable to a recession as more cyclical goods. Importantly, 60% of group sales are in emerging markets, thus providing good opportunity for growth.

The dividend

Let’s look at the track record. Over the last 38 years, FTSE 100 constituent Unilever has grown the dividend by 8% annually on average, and those returns are backed up by strong cash generation. In other words, the company is generating the cash to consistently return money to shareholders. Currently yielding around 3%, Unilever has weathered the Covid-19 pandemic well, and I see no reason to expect this to be cut. Whilst there are higher yields available on the market (WPP and Pearson, for example), I’m always placing sustainability front and centre in my decision.

Foolish final thoughts

Nothing is certain in investing, and there is an element of risk every time we dip our toe into the market. However, this risk can be reduced by following the Fool ethos of researching high-quality, long-term investments. The analysis shows Unilever has a strong past, bright prospects, and is well placed to continue shareholder payouts. In my opinion, it’s a buy recommendation with my £1,000.

The post Have £1,000 to invest? I’d buy this FTSE 100 dividend stock appeared first on The Twelfth Magpie.

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Ben Watson holds no position in any share mentioned. The Motley Fool UK has recommended Pearson and Unilever. 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.

Sainsbury’s share price – recovering or ailing?

My Foolish colleague Karl Loomes argued in April that the shares appeared oversold. In my eyes, market sentiment has been against Sainsbury’s for some time now. Its share of the UK grocery market has declined from around 17% at peak to 14.9% currently, whilst the expensive failed merger with Asda dented confidence in the group management. Although the pandemic has led a surge in grocery demand, this has been through the less profitable channel of online sales. Analysts also expect around £500m of pandemic related costs, forcing a delay in store investment.

It is also interesting to note that Sainsbury’s depends heavily on non-food sales, driven mainly by its acquisition of Argos. This element of choice purchases by consumers leaves it more vulnerable to the economic downturn that we now find ourselves in.

The final dose of bad news for investors comes in the form of the ailing bank. After requiring significant capital injections over the last two years, the expectation is that a further £350m could be needed to cover bad debts and write-downs until 2023. The period of historically low interest rates also makes generating profit from banking difficult.

Foolish summary

Given these significant headwinds, I can’t see any basis for investment, so I’m avoiding the Sainsbury’s share price for now. Indeed, it has declined further since the April examination.

However, if you do like the look of the supermarket sector in general, long-serving Fool contributor Peter Stephens touched upon Morrisons earlier this month. I see reasons to be optimistic in its latest trading statement.

The share price is nearly identical to Sainsbury’s, but Morrisons is yielding a superior dividend, and has lifted its interim payout by 5.7%. Although half year profits fell significantly, the rise in like-for-like sales excluding fuel sat nicely at 8.7%, leaving it well placed to focus on improving profitability. Similar to Sainsbury’s, a portion of this growth was through the online channel, but crucially Morrisons is starting from a smaller online and delivery presence than its rivals, and as such has more room to grow. The strengthening of its relationship with Amazon also gives more room for expansion in this area.

In announcing expectations of improved free cash flow, reduction in net debt and underlying pre-tax profit, I see a momentum in Morrisons that Sainsbury’s lacks, and as such the former’s shares are worth a very close look from potential investors in my opinion.

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Ben Watson holds no position in any share mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has no position in any of the companies 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.