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It looks like the UK government’s recent Budget has affected the FTSE 100‘s J Sainsbury (LSE: SBRY).
Over the past month, the share price has fallen around 15% and now sits at just under 252p, as I write on 8 November.
The news outlets have been reporting that chief executive Simon Roberts has some concerns. He thinks the changes announced to employers’ National Insurance will add about £140m annually to the firm’s tax bill.
On top of that, the government raised the minimum wage for most adults. Roberts told reporters the low profit margins in the supermarket industry will mean prices going up for customers. In other words, there isn’t enough meat in the company’s profits for Sainsbury’s to absorb the cost increases.
Because of that, Roberts thinks the moves in the budget will likely stoke up inflation.
A positive outlook for the business
It looks like all the uncertainty has caused the share price to fall. But this situation may be a decent opportunity for investors to pick up a few shares in J Sainsbury at a better valuation.
All supermarket businesses are in the same boat over the cost increases. So consumers will likely have to absorb higher food prices everywhere they may shop. My assumption is that J Sainsbury will be able to preserve its profit margins in the coming months and years by raising its selling prices.
Meanwhile, the company released its half-year results on 7 November. Roberts said the food business has been gaining market share, with continued “strong” volume growth.
The directors expressed a positive outlook for the business, and I don’t think the government’s Budget changes that in the long term.
However, City analysts expect normalised earnings to drop by about 22% in the current trading year. After that, there’s likely to be a bounce-back of about 16% during 2025.
Meanwhile, estimates for the dividend are upbeat with mid-single-digit percentage increases projected for this year and next.
A defensive sector
Looking ahead then, the anticipated yield’s running at just over 5.7% for next year. So that’s a decent amount of income for shareholders to collect. I reckon the company has every chance of maintaining its dividends in the coming years.
But there are risks for shareholders. The first is the low profit margins in the industry that Roberts talks about. Another is the fierce competition in the sector, which means it takes a lot of effort to make every meagre pound of profit.
Nevertheless, the food sector has defensive characteristics because people must buy and eat food whatever the general economy may be doing. On top of that, J Sainsbury has a good record of dividend payments, showing that it is competing well in the industry.
With the projected dividend yield well above 5%, the income may help to compensate investors for the risks they take by holding the shares.
For that reason, I see J Sainsbury as well worth investors’ further research time and consideration now.
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