Stock of the Week: J Sainsbury

VIDEO: Shine has come off supermarket shares this year as inflation bites, but dividends are a consolation

James Gard 4 July, 2022 | 9:40AM
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James Gard: Welcome to Morningstar. Our latest stock of the week is Sainsbury's, which is just about to release its first quarter trading update. Along with petrol and energy bills, food prices are giving consumers a massive headache this year. Supermarkets are unsure whether to pass these increases on or cut prices in the case of Sainsbury's. The supermarket's recent full year results were good, but it has warned that this year profits will be reduced by higher inflation.

Sainsbury's shares are off around a quarter this year, and in comparison, Tesco's shares are off around 13%. If the share price is uninspiring, what about the dividends? Well, this stock pays around 6%, and the company is just about to pay a dividend of 9.9p per share in July. Morningstar analysts assigned Sainsbury's a fair value of 278p, above the current price of around 200p.

Clearly, the shine has come off supermarkets since the end of the pandemic. Many people are eating out more and those on tighter budgets are increasingly cautious about what they buy. Morningstar analysts are optimistic about the medium and long-term prospects for Sainsbury's. They think the company has a strong online presence and the supermarket is in a strong position in a very, very competitive U.K. grocery market.

One potential curveball for investors and one that could be lucrative is the private equity interest in the supermarket sector. Morrisons has been bought out, and there is speculation that Sainsbury's will be next. However, that speculation appears to have died down for now.

For Morningstar, I'm James Gard.

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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James Gard  is senior editor for Morningstar.co.uk