Asda Failure Still Hanging Over Sainsbury's

THE WEEK: Morningstar columnist Rodney Hobson praises an improved performance from supermarket Sainsbury's, which is still counting the cost of its blocked merger

Rodney Hobson 3 May, 2019 | 11:34AM
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It’s good to have a bit of better news from supermarket group Sainsbury’s (SBRY) after a torrid nine months that has seen the shares slump from 340p to less than 220p, lower than the level they had reached when the ill-fated proposed merger with Asda created a false dawn.

Underlying profits were up 7.8% in the 52 weeks to March 9, better than analysts had expected, and the dividend total is raised by a similar percentage to 11p in line with a policy of paying out two times underlying earnings.

Although sales in supermarket stores rose by only 1%, convenience stores sold 3.7% more and online sales rose 6.9%. Despite accelerated investment in stores and technology, net debt has been reduced by £222 million thanks to strong cash generation.

Argos is growing sales, though it doesn’t seem to be attracting much custom at my local branch. At least it is producing synergies and cost cutting in line with expectations.

However, there’s no getting away with the disappointment of the refusal of the Competition and Markets Authority to allow the merger with rival Asda. With hindsight, it was perhaps a little ingenuous to believe that it would ever gain approval though I am as guilty as anyone on that score – the leap in Sainsbury shares from 225p to 340p last autumn was a great opportunity to sell that I spurned.

Chief executive Mike Coupe reckons the £46 million spent on advisers was worth the risk but that cash plus the cost of integrating Argos and other reorganisation costs took statutory pre-tax profits down from £309 million to £219 million.

Sainsbury shares jumped on the results announcement but I can’t honestly advise investors to pile in. Unless there is more good news – and independent figures for the retail trade suggest that Sainsbury had a poor Easter – this will prove to be a dead cat bounce.

Howden Braves Brexit

No doubt the good spring weather helped the building trade but one shouldn’t detract from the trading statement from Howden Joinery (HWDN) covering 16 weeks to April 20. Revenue was up 5.7% overall and 3.9% on a like-for-like basis.

This time last year Howden relied on a strong increase in volumes to boost revenue; this time it made price increases stick in January. It has opened eight new depots so far out of a planned total of 40 for 2019.

Howden wisely sounds a note of caution for the rest of the year, saying it remains watchful of “the further impact that Brexit may have on the economy”. We’ve had nearly three years of uncertainty already and it doesn’t seem to be doing Howden much harm.

The shares rose 2.5% on the update and have recovered from 420p just before Christmas to 515p now. Given that they have topped 530p in the past 12 months they don’t look overpriced. The yield is 2.25% based on last year’s dividends but the pay-out will surely be increased again this year.

Glaxo Gets Tough

It’s tough for pharmaceutical companies. Producing new drugs is expensive and time consuming, with a high failure rate. But if you don’t produce new blockbusters you risk a sharp shrinking of income as patent protection for existing drugs comes to an end.

GlaxoSmithKline (GSK) has taken the tough decision to weed out the less promising drugs in an aggressive fashion to concentrate on the best prospects. It’s risky, but this more disciplined approach seems to be working. The first quarter trading update was better than expected, with sales growth in all three divisions.

The shares have moved erratically sideways for the past five years, between £12.50 and £17. That is likely to continue – but in the meantime shareholders like me will keep cashing the dividends.






Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice, nor are they the opinions of Morningstar.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
GSK PLC1,667.80 GBX0.36Rating
Howden Joinery Group PLC856.20 GBX1.18
Sainsbury (J) PLC245.80 GBX-1.44Rating

About Author

Rodney Hobson

Rodney Hobson  is a columnist for and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

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