With a dividend approaching 5% and a low price-to-earnings multiple, the Sainsburys (LSE:SBRY) share price looks mighty tempting right now.
The shares have fallen by 15% since January 2019. If youre bullish for the future, thats a tidy discount.
Sainsburys appears on the face of it to be a much better buy that its FTSE 100 rivals Tesco and Morrisons that can only offer dividends in the 2.3% range, at twice the price with trailing P/E ratios approaching 20. So whats the problem?
Asda fail
The unsuccessful 7.3bn takeover of Asda has heaped extra pressure on the Sainsburys share price, which perhaps explains why it is trading at just 10 times earnings.
Bosses originally told the market that the mega-merger which would see the UKs second and third-largest supermarket chains join forces would help them to cut costs by 1.6bn and pass 1bn of savings to shoppers.
It would also make Sainsburys the largest supermarket by market share, beating long-time rival Tesco.
But the Competition and Markets Authority struck down the deal in April and slapped a 10-year ban on the two giants attempting a merger, warning that the union posed too great a risk for higher prices and less choice for shoppers.
Profit warning
There was more concerning news in a second quarter trading statement for the 12 weeks to 21 September.
CEO Mike Coupe (who, lets not forget, angered shareholders by taking a 7% pay rise to 3.8m in the wake of the failed merger) announced a five-year 500m cost-cutting exercise and said that underlying half-year profits would take a 50m hit.
Does this turnaround plan make the Sainsburys share price a buy? Not for me.
Its a change which is sorely needed, thats for sure. While revenues have increased over the last four years, from 23.5bn to 29bn, over the same period both operating profits and pre-tax profits have almost halved, from 707m to 312m, and from 548m to 239m respectively.
Profit warnings should be a red flag to value investors in general, as they rarely happen in isolation. Its more likely that a second profit warning will follow the first, which leads inevitably to another share price slide. Then that headline P/E ratio starts to look less of a bargain.
Measure for measure
According to the latest trading update, like for like sales were under water to the tune of 0.2%, which sounds like an improvement set against a 1.6% loss for the first quarter of 2019. But compared to upstart rivals like Lidl, which posted sales growth of 9.2% across the same period, it looks less impressive.
Sainsburys will close up to 40 stores at part of its reorganisation and its financial services arm Sainsburys Bank will follow Tesco out of the market, putting an immediate stop to new mortgage lending.
The takeover of Argos in 2016 also looks to be adding more costs to Sainsburys bottom line: it said as part of the update that it would close 70 Argos stores and bring 80 more into Sainsburys supermarkets.
I just cant see the upside to the Sainsburys share price at the moment, and Id say there are a whole host of more attractive options available to investors looking for quality shares at a good price.
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