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Questor share tip: Three things to look for in Sainsbury's results
The supermarket group is set to cut its dividend, slow expansion and reduce profits, says Questor
J Sainsbury
261.2p +6.5p
Questor says SELL
Investors get to see the results of new chief executive Mike Coupe's strategic review tomorrow and here are the three things Questor will be looking for.
Dividend chop
Sainsbury’s investors should be prepared for a cut in the dividend, the question is how low will it go? Last year's interim dividend was 5p, and a 30pc cut on that would be in the 3.5p region. However, with profits also set to fall it would make more sense to cut the dividend lower to give it room to rise, so a 50pc cut to 2.5p wouldn't be a surprise. Using the rough guide of one third at the interim to two-thirds at the final, gets us to a full-year dividend forecast of between 10p to 12p, or a prospective yield of 3.8pc, down from 17.3p, or 6.6pc last year.
Profit margin outlook
The City expects Sainsbury's to post a 12.5pc fall in underlying pre-tax profits to £350m. That would push full-year pre-tax profits down 25pc to £670m, on revenue largely flat at £24bn, or a profit margin of 2.8pc. All eyes are now on profit margin guidance for the future. When Justin King arrived at Sainsbury’s in 2004 he halved the profit margin to about 1.5pc, and applying the same logic would lead to about £360m in pre-tax profits, or about 16p in earnings per share (eps) for the year ended March 2016. A sustainable dividend on those earnings would be about 8p. If Mr Coupe decides to tackle the discounters head on and cut the profit margin then applying the current price earnings ratio of 10 times gets to a share price of between 160p to 200p.
End of the space race
John Kershaw, analyst at Exane BNP Paribas, said that Sainsbury’s might cut the amount of space it opens by a third. He expected Sainsbury’s to open less than 500,000 sq ft of new selling space in the next financial year, down from 750,000 sq ft this year. If the company mothballs sites earmarked for new supermarkets then it might be forced to writedown the value of land on its balance sheet. Clive Black, an analyst at Shore Capital, said Sainsbury’s might cut capital expenditure from just below £900m this year to between £550m and £600m in future.