With Brexit on the horizon, and a shock win in the US for Donald Trump, markets are likely to remain volatile for the foreseeable future. If you still need stable returns from your shares during this troubled period, it probably makes sense to focus on ‘boring’ income stocks.
I reckon that UK-focused dividend heavyweights SSE (LSE: SSE) and J Sainsbury (LSE: SBRY) could be ideal buys. Both companies issued interim results this morning. In this article I’ll take a closer look at the latest figures, and consider the outlook for each stock.
Inflation pressures hit profits
Sainsbury’s was the biggest faller in the FTSE 100 this morning, shedding more than 5% after admitting that underlying pre-tax profit fell by 10% to £277m during the first half, missing consensus forecasts of £282m.
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Although Sainsbury’s reported sales rose by 1.8% to £12,642m, like-for-like sales from Sainsbury’s stores fell by 1% during the period. There was no detail on trading at Argos, which has only been part of the group since the start of September.
Second-half profits are expected to be lower than those reported for the first half, as the weaker pound means that import costs are rising. Like all supermarkets, Sainsbury’s is under pressure to keep retail prices low, which means the group’s profits margins are likely to fall. Despite this, Sainsbury still expects to meet current consensus forecasts for the full year.
This might seem unlikely, but today’s underlying earnings of 11.2p per share account for more than half of the full-year earnings of 20.5p per share shown in current market forecasts. Sainsbury only needs to generate underlying earnings of 9.3p per share during the second half in order to match current expectations. Given that this period includes the key Christmas trading season, this shouldn’t be an impossible target.
Assuming current guidance is maintained, Sainsbury’s shares now trade on a forecast P/E of 11.7, with a prospective dividend yield of 4.2%. This seems reasonable value to me.
How safe is this 5.8% yield?
SSE’s inflation-linked dividend policy is one of the cornerstones of its investment appeal. Wednesday’s interim results confirmed this policy is still in place. The interim payout rose by 1.9% to 27.4p per share. This puts investors on track to receive a forecast full-year payout of 90.5p, equivalent to a 5.8% yield.
Adjusted earnings are expected to rise slightly this year, but it seems this will be dependent on a strong winter performance. SSE’s adjusted earnings fell by 25.5% to 34.2p per share during the first half. The company said that this was due to a fall in renewable energy output, lower retail customer numbers and “an unusually high proportion” of debt interest payments during the first half.
SSE confirmed this morning that it expects to report adjusted earnings of “at least” 120p per share for the 2016/17 year, in line with consensus forecasts of 121p. This puts SSE shares on a forecast P/E of 13, with a prospective yield of 5.8%. As a long-term shareholder myself, I remain happy. I may consider adding to my holding if the share price falls any further.
