Sainsbury’s review could see dividend cut
01:00, 11 november 2014
· Av CMC Markets
When Terry Leahy left Tesco a few years ago he appeared to leave the UK’s number one supermarket chain in pretty good shape, or so it appeared at the time.
It now turns out that the company’s well documented problems may well have predated his departure but his leaving did turn out to be a turning point as to how investors perceived Tesco as a brand.
While Tesco’s problems have been well documented they have been compounded by the arrival of some new kids on the block in the form of Aldi and Lidl at the bottom end of the range, while the emergence of Waitrose at the top end has resulted in a pincer movement on all of the big four supermarket brands.
The big question now is whether, with the departure of Justin King, the fortunes of Sainsbury follow a similar path?
If the price performance of the sector this year is any guide there is an argument that a lot of the bad news may already be priced in, but nonetheless it wouldn’t be surprising if we got some more bumps along the way.
Speculation is rising that this week could well see a dividend cut when Sainsbury’s unveils its latest trading update for the first half of this year with many expecting a 12.5% fall in profits, as the new CEO unveils the results of the recent strategic review into the business.
The new CEO Mike Coupe certainly has his work cut out in stemming the pessimism surrounding the sector with Sainsbury’s share price down over 30% since the beginning of this year, which is quite a big drop, though compared to its peers Tesco and Morrisons it’s the best of a poor performing bunch.
It’s certainly difficult to be optimistic about a sector that has had a nightmare in 2014 and the likelihood is that in an economic environment that has seen shopping habits change and evolve significantly in the last five years the next steps for the leading players are likely to be crucial in seeing off the threat of the new budget retailers.
Sainsbury's have already announced that they are taking the fight to Aldi and Lidl with last week's tie up with Netto in the North of England as it launches 15 new stores.
The direction of travel appears to be for smaller town centre stores as shoppers do less of the big out of town weekly shop and opt for shopping on a more frequent basis, while showing a lot less brand loyalty, and opting for value and convenience instead.
Recent figures from Kantar WorldPanel showed that like for like sales had slid 3.1% on the quarter while its market share had started to slip back, which could be a worry for investors.
Early indications are that as part of a program to pay for a new round of price cuts and discounts in the lead-up to Christmas, that the new CEO Mike Coupe will announce the cancellation of its new store opening program and could announce a cut in its dividend.
The dividend yield as a percentage of the share price is quite high at well over 6%, but the dividend cover is still around 2% so there’s no guarantee it will be cut, but given the challenges facing the sector over the next 12 months, including an increase in business rates from next April, it must be vulnerable.
With the share price languishing near its lowest levels since early 2003, any move below the recent lows at 220p could well see further declines.
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