Sainsbury shares may be the pick of the FTSE 100’s two supermarkets with a notably better dividend yield and attractive multiples.
Supermarkets experienced a mixed pandemic with sales jumping as consumers chose higher priced goods due to lockdowns, but the retailers also faced a squeeze on margins as a result of higher costs.
In the key Christmas trading period, Sainsbury’s sales saw an increase of 2.4% as the company saw the benefits of their pricing strategy and a surge in online sales.
Simon Roberts, CEO, J Sainsbury said, “”I am really pleased with how we delivered for customers this Christmas. More people ate at home and our significant investment in value, innovation and service led to market share growth. At the same time, we are pleased to increase profit guidance for the full year.”
The strong festive period results saw the Sainsbury share price increase. Despite a strong start to the year, their shares have since tumbled and are now trading 10% year-to-date.
This will be catching the eye of investors that follow supermarkets due to their reliable cash flows and relative stability when compared to other sectors.
However, just a consumers will weigh up the value of Sainsbury’s products against competitors, investors will make comparisons between the supermarkets for relative value of their shares.
Following the takeover of Morrisons by a US group, Sainsbury’s and Tesco are the only two supermarkets listed in the FTSE 100.
When a comparison of these two groups are made, Sainsbury’s provides better value than Tesco on a number of key valuation metrics.
Earnings Multiples
Sainsbury’s currently has forward PE Ratio of 10.8 compared to Tesco’s 12.8.
The trailing PE also reflects better value in Sainsbury’s shares with a PE of 21.8 and Tesco’s 23.1.
These are of course small differences, but there is a notable opportunity for Sainsbury’s valuation to move back inline with it’s peer. If Sainsbury’s was to move in line with Tesco it would suggest roughly 20% upside in shares.
Sainsbury’s Dividend
Income investors will also see the attractiveness in Sainsbury’s dividend which is currently providing a yield of 4.3% compared to Tesco’s 3.6%.
Given Sainsbury’s dividend policy is to pay dividends covered by full year underlying earnings or at 1.9 cover, this doesn’t look under threat and has room for an increase in the coming year.
Having paid a 7.40p full year dividend in 2021, one would expect this to increase incrementally as they recover from the pandemic. There should, however, be a note of caution around the impact of inflation and rising prices, whilst Sainsbury’s fight for increased market share.