I have zeroed in on two shares for my portfolio. These are businesses that I think show growth potential and can generate cash even in tough economic conditions.

Grocer with sky-high dividends

At current levels, I think the Sainsbury (LSE:SBRY) share price is one of the best bargain options in the FTSE 100 right now. AT 209p, it is trading at a price-to-earnings ratio of 7.2 times and a lofty 6.2% yield.

Yes, the company has been in the news this week after last quarter’s sales dipped 4%. But this was in line with board expectations and the profit estimate for the year remains unchanged at between £630m and £690m. While this is lower than the 2021-22 profits of £730m, the company has a few plans up its sleeve. 

Given the rising raw material costs, the board will inject £500m over the next 24 months to keep product cost inflation at the minimum. I think this move will help the grocer gain footing on Tesco and grow its current 15% market share as inflation runs rampant.

Despite small margins, if profit estimates are met, the company expects to generate retail free cash flow of at least £500m in 2022-23, similar to last year’s £503m. I think the board will keep the payouts flat next year given tough economic conditions. But a healthy 5%+ yield looks likely, which I see as a positive.

However, the impact of inflation will hit this sector hard. Large grocers like Sainsbury will lose out to discount retailers, even if current prices are maintained. And this will inevitably eat away at Sainsbury’s revenue. 

But overall, this FTSE 100 firm looks well-set to navigate choppy waters. I am bullish on Sainsbury shares and will consider them for my portfolio in 2022  if signs of a market recovery become stronger. 

Alcohol heavyweight

Diageo (LSE:DGE) is a global alcohol aggregator that owns extremely popular brands like Smirnoff and Johnnie Walker. The FTSE 100 company has adopted an emerging market strategy, focusing on growing regions like India and China.

Down 14.8%, I think the Diageo share price is going through a rare lull given its steady rise over the last five years. And looking at the share price action over the last two decades, the company has been on an incredible upward trajectory. 

And I think this growth could continue given its fast expansion policy. Diageo recently purchased Vivanda, owner of a flavour matching technology. This will allow users to build a flavour profile and choose spirits based on suggestions. I think the company is adopting digital sales and shows a lot of growth potential.

Tough regulations and local competition will grow with expansion. And the company will have to deal with the rising tide of health-conscious youth who are choosing to go alcohol-free in record numbers. 

However, I think the company is well-placed to navigate this given its size, range, and future plans. This FTSE 100 share is not a bargain on paper at 3,525p, but I think the company offers a lot of value and growth. This is why I will wait for a drop in share price before investing.

The post 2 top FTSE 100 shares to buy before a new bull market appeared first on The Twelfth Magpie.

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• How much longer can the Diageo share price stay this low?
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Suraj Radhakrishnan has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo and Sainsbury (J). 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 J Sainsbury (LSE: SBRY) share price is firmly in negative territory today. That’s despite the FTSE 100 constituent reporting that it had gained market share over the last six months and was in a solid position as the festive season approaches.

With the stock having come back down to earth following a flurry of takeover talk, is now a perfect time for me to buy?

Higher sales

Grocery sales rose 0.8% in the 28 weeks to 18 September compared to the same period last year. Perhaps more tellingly, sales were 9.1% higher relative to two years ago when few of us had ever uttered the word ‘coronavirus’. 

Sainsbury also said that it had made ground on competitors as a result of offering better value, new products and improved customer service. It had also seen “significantly lower” costs over the period. 

It wasn’t all rosy. Sales of General Merchandise fell by 5.8% compared to last year. That’s not necessarily surprising given the huge boost the company experienced as a result of multiple UK lockdowns in 2020. Again, the comparison with sales two years ago is probably a better gauge of performance. On this measure, sales were up 1.1%.  

So, why is the Sainsbury share price down? 

Looking ahead, CEO Simon Roberts warned that supermarkets face “labour and supply chain challenges“. Notwithstanding this, he went on to say that the company’s scale, operations and relationships with suppliers should allow it deliver “the best possible Christmas” for its shoppers. The market, it would seem, is less optimistic.

Investors may also have been spooked on expectations that customer behaviour will continue to “normalise” and growth in grocery sales “moderate“. This is hardly revelatory. Nonetheless, it arguably implies that SBRY is not the investment opportunity it once was. 

Despite this, no changes were made to guidance. Having hit £371m over the first six months, underlying pre-tax profit is still expected to be at least £660m for the full year. 

Takeover talk

Sainsbury stock was priced at 13 times earnings before the market opened. Valuation-wise, this puts it on par with rival Tesco. In terms of recent share price performance, however, there’s no contest. The Sainsbury share price is up almost 34% over the last year. Tesco has gained just 2%. 

Does this make SBRY a screaming buy? I’m not so sure. Sainsbury’s superior gains can probably be attributed to rumours that it’s now a bid target following the acquisition of Morrisons by private equity. 

Clearly, the share price could soar again if these rumours resurface. That said, I would never buy a stock solely on this possibility. As a long-term Fool, it’s the underlying business that matters to me. And with suggestions that Christmas sales at (Sainsbury-owned) Argos are likely to be held back by limited product availability, I can’t see the next few months being easy.

It seems I’m not alone. The stock continues to attract significant interest from shorters.

Better buy

I’ve long considered Sainsbury to be a value trap. Recent performance flies in the face of this. In an industry where clout matters, however, I still think the best option is Tesco. It has almost double SBRY’s market share, offers a similar dividend yield, has lower debt relative to its size and slightly better margins.

This all gives it an edge when it comes to selecting FTSE 100 stocks for my own portfolio.

The post The J Sainsbury share price falls despite rising sales. Should I buy now? appeared first on The Twelfth Magpie.

More reading

• How much is needed in a Stocks and Shares ISA to aim to retire on £12,548 a year?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Morrisons and Tesco. 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.

As my colleague Cliff D’Arcy highlighted last month, the last six months have seen a solid 30% growth in the Sainsbury’s (LSE: SNBY) share price. Partly due to the Covid-19 pandemic forcing people to eat more at home, the recent boost in price is also because of sentiment towards the sector linked to an attempted takeover of rival Morrisons. With the stock currently trading at just over 300p, is now a good time for me to buy shares in the UK’S second-largest supermarket chain? Let’s take a look.

Sainsbury’s results

As I mentioned above, the pandemic has played a massive role in the Sainsbury’s rise – and this was seen in its recent results. Total retail sales were up 7.3%, and digital sales rose by a staggering 102%. These sales now equate to 42% of total sales. The supermarket giant also acquired Argos back in 2016, whose sales grew over 10% for the year. Regardless of the fact stores are now open again without restrictions, I still think that many people will continue with online shopping as it is a convenient way to shop. This provides me with confidence when investing in Sainsbury’s. A continuation of this sort of performance is likely to lead to a rise in the Sainsbury’s share price.

Takeover news

Private equity firms have been on a shopping spree in the UK recently, with supermarket chains being targeted. The very speculative news of a potential takeover approach last month by US firm Apollo saw a 15% rise in the Sainsbury’s share price, while competitor Morrisons is the centre of attention from bids by private equity firms CD&R and Fortress. As it was decided this week that the final decision will be decided via auction, could it be that the loser eyes Sainsbury’s as an alternative? The supermarket certainly is an attractive buy, with strong recent performances and nearly 16% market share in the UK. A takeover would boost the Sainsbury’s share price.

What does concern me about Sainsbury’s is the level of competition I expect it to face in the future. Cheaper alternatives such as Aldi and Lidl continue to gain in popularity, and this could be a major issue. The German discounter has also begun to venture into the world of online shopping, starting with a click and collect service. This could threaten the Sainsbury’s online business, which was an important factor in its impressive results. Aldi has also been expanding its number of physical stores, with a target of 1,200 by 2025. A loss of market share could see the price of Sainsbury’s stock plummet.

Should I buy?

The most convincing factor for me to buy is the fact I see the chain as a viable acquisition target for a private equity firm. A takeover of this kind would see a large boost in the price of the stock. What does concern me, however, is competition. Market disruptors such as Aldi could pose a huge threat in the future. For this reason, I am going to avoid adding shares to my portfolio for now.

The post The Sainsbury’s share price is up 30%. Should I buy? appeared first on The Twelfth Magpie.

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• How much is needed in a Stocks and Shares ISA to aim to retire on £12,548 a year?

Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has recommended Morrisons. 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.

Takeover bids

The recent Morrisons takeover news has brought a new focus on the UK supermarket industry. US private equity firm CD&R were pitted against competitor Fortress in a bid to buy Morrisons. This helped drive the Morrisons share price to all-time high territory.

This has been good news for the wider industry, with Sainsbury and Tesco both seeing share price increases of 5% and 10% in the past month.

Is Sainsbury the next target?

The Sainsbury share price leaped 15% when markets opened on 23 August. This seemed to signal investors believed Sainsbury could be a viable acquisition opportunity.

Looking at the current value of Sainsbury shares I believe there is a case for this. Shares are currently sitting at 303p and trading off a price-to-sales (P/S) ratio of 0.24. Competitors Tesco and Morrisons trade off slightly higher P/S ratios of 0.34 and 0.40 respectively. Sainsbury’s shares seem to offer good value here, an appealing attribute for a theoretical acquirer.

Looking at market shares, Sainsbury holds 16% of the UK market. This is significantly below Tesco’s 27%, but also above Morrisons’ 10%. This places Sainsbury as the second-largest company in its market.

The enterprise value (EV) of Sainsbury is also encouraging for the acquisition case. EV is a measure of the market cap plus net debt. This is essentially a figure of how much you would need to pay to acquire the business. Sainsbury’s EV is currently $13bn, not far off of Morrisons’ £10bn. Tesco on the other hand currently boasts an EV of £31bn. With Fortress and CD&R having total assets under management of £35bn and £16bn, respectively, I couldn’t see either of them bidding for Tesco. This leaves Sainsbury as a much more viable choice.

Therefore, I think there is a case for the acquisition of Sainsbury. This would undoubtedly lead to an explosion of the Sainsbury share price.

Long-term outlook

The most recent results are likely to have helped the Sainsbury share price too. Total retail sales were up 7.3%, and digital sales up 102%, now combining to 42% of total orders. Online shopping has been amplified because of the pandemic, with many people now sticking to shopping online. The fact that this part of Sainsbury’s business is so strong gives me confidence for the future.

Overall, I think it is fair to say an acquisition is viable. This could lead to an increase in the Sainsbury share price. However, I don’t like to base my investments on theoretical events – I don’t want that risk for my portfolio. I still think Sainsbury could prove a good long-term investment, but I won’t be buying any shares today.

The post Is the Sainsbury share price about to explode? appeared first on The Twelfth Magpie.

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• How much is needed in a Stocks and Shares ISA to aim to retire on £12,548 a year?

Dylan Hood has no position in any shares mentioned above. The Motley Fool UK has recommended Morrisons. 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 J Sainsbury (LSE: SBRY) share price has performed brilliantly over the last year, rising 57% by last Friday’s close. It’s up another 11% this morning. Could it be about to explode?

Sainsbury’s share price: ready to rocket?

According to headlines over the weekend, private equity group Apollo is taking a closer look at Sainsbury. While this has been referred to as merely “exploratory” (according to the Sunday Times), it does suggest that we could be about to see an offer submitted for the FTSE 100 member. 

This shouldn’t really come as a surprise given the bidding war that has erupted for fellow listed supermarket Morrisons. Last week, it was revealed that management would be recommending holders accept a 285p per share bid for the company from Clayton, Dubilier & Rice (CD&R). This valued MRW at £7bn, up from the £6.7bn offer received from rival Fortress. 

Sainsbury’s attractions aren’t hard to fathom either. For one, the shares still look reasonably valued and, before this morning, changed hands for a little less than 14 times earnings. It’s also got a big property portfolio and currently has the second-largest share of the UK grocery market.

However, this is not to say that I would be guaranteed a great return on my investment if I bought today.

No guarantees

One rather obvious risk to buying SBRY now is that it won’t actually receive a bid. One can name many firms in the FTSE 100 that have looked like prime takeover candidates for years but that are still to be snapped up. Broadcaster ITV springs to mind. Luxury fashion firm Burberry is another. Both already occupy places in my portfolio. However, I own them because they are, in my view, great businesses. If I were to buy the supermarket’s stock now, I’d need to be confident that Sainsbury is capable of delivering a solid gain without any bid interest.

A further, potential issue here is that Apollo could join forces with Fortress and launch another counter bid for Morrisons. Were this to happen, any talk about acquiring its rival would likely end and the Sainsburys share price rally may run out of steam.

It’s also worth highlighting that SBRY is among the most shorted stocks on the London Stock Exchange, according to shorttracker.co.uk. In other words, a good proportion of traders are betting that the Sainsbury’s share price will fall. 

Of course, this could actually work in investors’ favour if bid rumours grow. In such a scenario, the aforementioned traders would rush to close their positions. The resultant ‘short squeeze’ would likely put a rocket under the Sainsbury’s share price. We may already be seeing some of this today. 

Undeniably positive

Based on recent news, I think there’s certainly a chance the share price could continue rising — and potentially explode — over the next few weeks. The fact that it’s already up 6% in early trading today is certainly evidence that the market is getting excited over the company’s near-term outlook.

Even so, I’m less inclined than others to buy today. Based on my own risk tolerance, (long) investing horizon and the business itself, my preferred choice remains market leader Tesco. And if I were solely looking for income from the supermarket space, this real estate investment trust looks by far the least risky option to me. 

The post Is the Sainsbury’s share price (SBRY) about to explode? appeared first on The Twelfth Magpie.

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• How much is needed in a Stocks and Shares ISA to aim to retire on £12,548 a year?

Paul Summers owns shares in Burberry and ITV. The Motley Fool UK has recommended Burberry, ITV, Morrisons, and Tesco. 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.

Yet the Sainsbury’s (LSE: SBRY) and the BT Group (LSE: BT.A) share prices are smartly up this morning, by around 7% at time of writing. So is now a good time to buy them?

Supermarkets are up across the board, boosted by the chancellor’s pledge to give retail, hospitality and leisure businesses in England a 100% business rates holiday for the next year.

Sainsbury’s paid more than £500m in business rates last financial year, so that’s a big deal. It equals the planned savings chief executive Mike Coupe was already planning to make by 2024. No wonder the Sainsbury’s share price was up more than 10% at one point.

Stock market crash boosts grocers

Unlike many FTSE 100 companies, the big grocers have seen demand climb. Shoppers are stockpiling and online delivery services are maxed out. If things go well, they could even number among the heroes of the Covid-19 crisis.

The Sainsbury’s share price is down around 12% year-to-date, but that looks good against the 30% drop across the FTSE 100 as a whole. It’s been in long-term decline for a decade, falling from 328p in 2010, to 204p today. When the coronavirus crisis recedes, it will still face tough competition from Aldi, Lidl, and the rest.

We should also remember that recent half-year profits fell by a punishing 92%. Sainsbury’s is not out of the woods yet.

The big attraction is it now trades at a bargain price of 9.1 times forward earnings, which gives you a cushion against further setbacks. I would primarily recommend it for its dividend yield, currently a generous 5.8%. And, unlike some stocks on the FTSE 100, it’s comfortably covered 1.8 times by earnings. Worth considering.

Here’s an even bigger FTSE 100 bargain

After peaking at nearly 500p in 2015, the BT share price has been absolutely savaged and trades at around 124p today. Investors who tried to catch this falling knife have the scars to prove it.

The coronavirus triggered another sell-off, with the stock falling 35% year-to-date. But it got a boost in last week’s Budget, when the chancellor confirmed plans to invest £5bn on rolling out full-fibre broadband across Britain. This will bring another 5m homes into the network, mostly in rural areas.

BT Group stock is climbing again following yesterday’s bailout, and looks even more of a bargain than Sainsbury’s. It’s trading at just 4.8 times forecast earnings, while its forecast yield is a dizzying 9.1%, with cover of 2.2.

That payout looks vulnerable though, given the planned 5G investment splurge, while its pension deficit and ballooning £18.2bn net debt cast a shadow. Also, there’s uncertainty over who ultimately foots the bill for the Premier League hiatus. The broadcasters?

BT has its troubles, but still made a full-year profit of more than £2bn in 2019. It’s an even riskier buy than Sainsbury’s though.

The post Forget the stock market crash! These 2 FTSE 100 bargains are flying and I’d buy them appeared first on The Twelfth Magpie.

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Harvey Jones has no position in any of the shares mentioned. 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.

This is an opportunity for retailers to get customers through the door, and wealth platform Interactive Investor has picked out two high street chains that may be worth buying in advance of next weekend’s splurge.

Dixons Carphone

Electrical retailer Dixons Carphone (LSE: DC) could do with some festive magic sprinkled over its share price, with the stock down 23% over the last year, and a thumping 66% over five years, driving it out of the FTSE 250 in May 2017.

Black Friday typically sees shoppers rush into electrical retailers, and the group’s brands in, Currys PC World, Carphone Warehouse and iD World, could reap the benefit. Dixons Carphone also owns electronics chains Elkjøp, Elgiganten and Gigantti in the Nordics, and Kotsovolos in Greece, and they will be joining in the global frenzy.

Most people buy electronics stuff online these days, but Interactive Investor head of markets Richard Hunter says Dixons Carphone has responded by taking “the clever approach of moving slower moving lines of stock online so that it can continue to transform its in-store experience”, and develop services such as the rollout of Gaming Battlegrounds.

Dixons Carphone, whose market cap has shrunk to £1.42bn, is a bargain itself, trading at just 8.5 times forward earnings. It offers a whopping forecast yield of 5.7%, with cover of 2.2, but tread carefully, as some think it is a shocking dividend trap.

I’m wary myself, and concerned to see City analysts predicting a 28% drop in earnings per share in the year to 30 April 2020, although they reckon things will recover the year after, growing 17%. Black Friday may offer a boost, but Dixons still has a long way to go.

Sainsbury’s

Hunter’s other Black Friday tip is FTSE 100 listed supermarket Sainsbury’s (LSE: SBRY), also in need of some festive fairy dust, with the share price down a third over the last year, partly due to the failed tie-up with Asda. At 212p, the Sainsbury share price is a third lower than it was 10 years ago.

Aldi and Lidl continue to seize market share by offering cut-price competition, while low consumer sentiment has also hit sales. However, shoppers are now getting richer in real terms, with inflation falling to 1.5%, but salaries growing 3.9% over the last three months.

CEO Mike Coupe fell short with Asda but his merger with Argos seems to be going reasonably well, and Hunter reckons this is where the Black Friday glory will come from: “Having had some success in 2018, Argos has already started a ‘Crazy Codes’ sale and is promising a bumper announcement in the lead up to Black Friday.”

Again, Sainsbury’s looks cheap trading at just 10.4 times forward earnings, while the forecast yield of 5% is covered eight times. The big danger is that market share just keeps on falling, while earnings are forecast to drop 8% this year and 4% next, so it could continue to struggle.

Black Friday may deliver a one-off boost, but both Dixons and Sainsbury’s need to prove their merit year round.

The post Black Friday is coming! I think these 2 stocks could be the day’s biggest bargains appeared first on The Twelfth Magpie.

More reading

• Up 3.5% this month, is it time for UK investors to cycle back into the more domestically-focused FTSE 250 index?
• How much is needed in a Stocks and Shares ISA to aim to retire on £12,548 a year?

Harvey Jones has no position in any of the shares mentioned. 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.

However, could this sorry history be about to reverse? In other words, is it time to buy the stock?

Recent performance

Let’s make no bones about it, Sainsbury’s performance over the last half-decade hasn’t been any more encouraging than its longer-term achievement. Earnings per share (EPS) have fallen in four of the five years, and another drop is forecast for the current year (ending March 2020). The dividend per share (DPS) has been similarly disappointing, and is expected to be cut to a new low this year.

If you’d invested in Sainsbury’s before its interim ex-dividend date in November 2013, you’d have paid around 400p a share and gone on to pick up a decade-high 17.3p annual DPS, giving you a nice yield of 4.3%.

However, today, you’d not only be sitting on a near-50% capital loss, but also (after multiple dividend cuts) be in for a yield of just 2.5% this year on your original investment. Heck, you can get a better annual interest rate than that on some regular cash savings accounts, with no risk to your capital!

Market expectations

Back in the summer, following its failed attempt to merge with Asda, I characterised Sainsbury’s as “a weak player in a tough market, and a company whose earnings outlook is deteriorating.”

At the time of its last annual results release on 1 May, market expectations for fiscal 2020 had been for a £652m profit before tax (PBT). Sceptical analysts at Barclays had noted acerbically that the company “is aware it would need to say something if this was plainly unachievable.”

The company said nothing. Yet less than two months later, on 28 June, it quietly published a revised pre-tax profit consensus forecast on its corporate website. This was £20m lower at £632m.

I suggested:“Keep an eye on that analyst consensus page through the rest of the year. I suspect you may enjoy an object lesson in how struggling companies manage down ‘market expectations’.”

Charade

In October, Sainsbury’s issued a restatement of its last annual numbers under new accounting rule IFRS 16, which it’s adopting this year. Key differences in last year’s numbers are shown in the table below.

On 5 November, the company also updated its analyst consensus page from pre-IFRS 16 forecasts of 28 June to post-IFRS 16 forecasts, as shown in the table below.

Looking at the significantly larger negative numbers in the forecast 2019/20 ‘difference’ line than in the restated 2018/19 results, I’d suggest what we’re looking at here is another backstairs managing down of ‘market expectations’, wrapped up in the change to IFRS 16.

I wouldn’t be surprised to see a further massaging down of this year’s numbers, and I wouldn’t trust current fiscal 2021 forecasts (PBT £595m, EPS 20.2p and DPS 10.3p) as far as I could throw them. As such, this remains a stock to avoid, in my view.

The post The Sainsbury’s share price has fallen 33% in a year. Time to buy? appeared first on The Twelfth Magpie.

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• How much is needed in a Stocks and Shares ISA to aim to retire on £12,548 a year?

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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.

Swept away

I certainly don’t when I look at the J Sainsbury (LSE: SBRY) share price, which is trading almost 20% lower than it was back then. The last year has been particularly brutal, with the stock down a third, as investors fled following the failed £7.3bn takeover of Asda. They’re creeping back this morning, although I wouldn’t crack open the bubbly just yet.

The FTSE 100 group’s stock is trading almost 2% higher after reporting “increased grocery momentum as we create one multi-brand, multi-channel business.” That shows how low investor expectations have fallen, given today’s numbers included a hefty 15% drop in underlying profit before tax to £238m for the 28 weeks to 21 September.

Management blamed the £41m reduction on “the combined impact of the phasing of cost savings, higher marketing costs and tough weather comparatives,” and said it was in line with guidance. Like-for-like sales (excluding fuel) fell 1%, while group sales were down 0.2% to £16.86bn.

Heavy weather

Sainsbury’s also reviewed its store estate, which led to £203m of one-off costs across the half, and was the main reason statutory profit before tax fell from £107m to just £9m.

CEO Mike Coupe hailed lowered prices on everyday food and groceries, a new range of value brands, significantly improved customer satisfaction and continued investment in hundreds of Sainsbury’s and Argos stores. He also cautioned that “retail markets remain highly competitive and the consumer outlook remains uncertain,” but said second-half profits should benefit from the annualisation of last year’s colleague wage increase, a normalisation of marketing costs, and weather comparatives.

It isn’t disastrous, but it does continue the theme of slow decline as the German discounters Aldi and Lidl expand and consumers retrench. Some investors would buy and hold Sainsbury’s forever for the yield, which is currently 5.1%, covered 1.9 times by earnings.

A forecast valuation of 10.3 times earnings may also tempt. However, earnings are forecast to fall this year and next, and operating margins are wafer-thin at 1.1%, although expected to climb to 2%.

Wholesale turnaround

This is a tough sector. Just look at FTSE 100 rival Morrisons (LSE: MRW), which is down 20% this year, although it’s up 27% measured over five years. Management is gamely testing out new ways to grow the business, targeting £1bn of wholesale revenues, expanding online via Amazon, and extending its convenience store network.

This is having a positive effect, with City analysts forecasting a 29% jump in earnings per share this year, and 7% next (compared to drops of 8% and 3% at Sainsbury’s). The Morrisons share price is more expensive as a result, trading at 14.7 times forecast earnings, albeit with a lower dividend of 3.5%, also covered 1.9 times. Again, operating margins of 2.3% are wafer-thin.

I feel a well-balanced portfolio ought to have some space for the big supermarkets, but I’m wary of recommending companies with such vast, sprawling operations that end up working to such fine margins. You might find other more convincing income plays out there.

The post Got £2,000 to invest in an ISA? Then I’d take a look at these 2 FTSE 100 dividend stocks appeared first on The Twelfth Magpie.

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• How much is needed in a Stocks and Shares ISA to aim to retire on £12,548 a year?

Harvey Jones has no position in any of the shares mentioned. 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.

Realism

Let me say at the outset, I think there’s no chance the share price will return to its pre-recession levels on any reasonable timescale. Sainsbury’s has about half-a-billion more shares in issue today. As such, a doubling of the price would put the market capitalisation back to its heyday when the ‘Big Four’ supermarkets ruled the roost.

How about a return to last year’s high? This would represent a still-very-decent 60% upside for buyers today.

M&A strategy

I was critical of Sainsbury’s acquisition of Argos a few years ago. It clearly had to do something to stem falling profits and dividend cuts, resulting from an increasingly competitive market and changing shopping habits. But I didn’t think the answer was to ramp up exposure to discretionary consumer spending by acquiring Argos. Tesco‘s and Morrisons‘ moves into wholesale — maintaining the defensive qualities of their businesses — looked a much shrewder idea to me.

Sainsbury’s proposed merger with Asda made more sense but, of course, was kiboshed by the competition regulator earlier this year. With Plan A(sda) having gone up in smoke, what is Sainsbury’s Plan B?

New strategy

My colleague Roland Head has given a good account of Sainsbury’s new strategy. I’d sum it up as: cut costs, tinker with the store estate, and curtail capital injections into the financial services business.

Sainsbury’s bank has immediately stopped new mortgage sales, and I suspect there are plans to grow consumer lending (the acquisition of Argos came with a large debtor book). This would see new business swing away from secured lending (mortgages) to unsecured lending (customer credit).

Ups and downs

I think Sainsbury’s exposure to discretionary consumer spending and unsecured lending makes it less defensive than its rivals. A merger with Asda would have reduced the weighting of its more cyclical businesses, as well as giving it benefits of scale. Such a business would have merited a higher rating, which is why Sainsbury’s share price climbed last year.

As things are, I think the company deserves a lower rating. What’s its current valuation, and do I see upside or downside from this level?

My view

At the time of Sainsbury’s last results, the City consensus forecast for pre-tax profit for the current year was £652m. However, less than two months later (28 June), the analyst consensus page on its corporate website was updated with a pre-tax profit forecast of £632m.

At the time, I suggested keeping an eye on the page through the year, suspecting we may get an object lesson in how struggling companies manage down ‘market expectations’. So far, the page — which also includes earnings and dividend per share forecasts of 21.6p and 10.6p — hasn’t been updated.

However, website ShareCast is showing a current consensus of £596m pre-tax profit, with earnings and dividend per share forecasts of 19.9p and 10.5p. I think the P/E of 10.7 and yield of 4.9% aren’t particularly good value. Furthermore, with forecasts trending downwards, I see downside risk and would avoid the stock at this stage.

The post Can the Sainsbury’s share price double your money? appeared first on The Twelfth Magpie.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. 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.