J Sainsbury (LSE: SBRY) shares are well ahead of rival Tesco over the past six months. But they’ve been up and down a lot in the past five years, with an overall 5% gain.
Sainsbury shares offer the better dividend yield of the two, forecast at close to 5% for the next few years, with Tesco’s at about 4%.
Stiff competition
There’s one main thing that I think counts against supermarket shares right now. Price wars.
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We hear wholesale price inflation is easing, and that some prices are on the way down. But It can take a few months to make it through to shelf prices.
However, we see the big players tripping over each other in the rush to show which is the most shopper-friendly price cutter. All of the big names have been slashing milk prices, for example.
Weak results
And it shows in the results. For the year just ended in March, Sainsbury chief executive Simon Roberts told us that “we have spent over £560 million keeping our prices low over the last two years.”
He says the supermarket now offers the best customer value it’s managed in a long time as a result. But it also means profit is down.
Revenue rose by 5.3%. But statutory profit before tax slumped by 62%. Basic earnings per share (EPS) crunched down by an even bigger 70%.
Underlying performance
On an underlying basis though, the firm says things were a good bit better.
Underlying profit before tax shows a 5% fall, coming in at £690m. Considering the previous year gave supermarkets a lockdown boost, when they were allowed to remain open, that looks like a fair result to me.
Underlying EPS was down 9%, which again I see as quite decent in this very tough year.
Sainsbury kept its dividend at 13.1p per share for the full year, which is a 4.6% yield. That’s not bad. But I think it’s a bit too early to tell if it’s sustainable.
Treading water
Sainsbury has set a goal of profit before tax in the range of £640m-£700m for the 2023/24 year. That hints at a bit of a drop on these latest figures. But it’s largely in line with City forecasts.
The firm also says it should “generate at least £500 million of Retail free cash flow“.
This should be a pretty good performance if it can pull it off, considering the state of the economy right now.
But to me it makes Sainsbury look like it’s just treading water, and muddling through until things get better. And price competition seems like the only game in town at the moment.
Buy Sainsbury shares?
So do I see Sainsbury shares as a buy? Well, I think the valuation is fair. And the dividend yield is a good one, though I’m not sure it will stay so high in the long term.
But in such a tough sector as this, I’d only buy the biggest and the best. And for me, that’s still Tesco.
