It’s difficult to overstate what a dire long-term investment J Sainsbury (LSE: SBRY) has been. The share price this year is at its lowest level on the chart I’m looking at — and the chart goes back to 1990! Thirty years of hurt, to borrow a famous refrain.
However, could this sorry history be about to reverse? In other words, is it time to buy the stock?
Recent performance
Let’s make no bones about it, Sainsbury’s performance over the last half-decade hasn’t been any more encouraging than its longer-term achievement. Earnings per share (EPS) have fallen in four of the five years, and another drop is forecast for the current year (ending March 2020). The dividend per share (DPS) has been similarly disappointing, and is expected to be cut to a new low this year.
If you’d invested in Sainsbury’s before its interim ex-dividend date in November 2013, you’d have paid around 400p a share and gone on to pick up a decade-high 17.3p annual DPS, giving you a nice yield of 4.3%.
However, today, you’d not only be sitting on a near-50% capital loss, but also (after multiple dividend cuts) be in for a yield of just 2.5% this year on your original investment. Heck, you can get a better annual interest rate than that on some regular cash savings accounts, with no risk to your capital!
Market expectations
Back in the summer, following its failed attempt to merge with Asda, I characterised Sainsbury’s as “a weak player in a tough market, and a company whose earnings outlook is deteriorating.”
At the time of its last annual results release on 1 May, market expectations for fiscal 2020 had been for a £652m profit before tax (PBT). Sceptical analysts at Barclays had noted acerbically that the company “is aware it would need to say something if this was plainly unachievable.”
The company said nothing. Yet less than two months later, on 28 June, it quietly published a revised pre-tax profit consensus forecast on its corporate website. This was £20m lower at £632m.
I suggested:“Keep an eye on that analyst consensus page through the rest of the year. I suspect you may enjoy an object lesson in how struggling companies manage down ‘market expectations’.”
Charade
In October, Sainsbury’s issued a restatement of its last annual numbers under new accounting rule IFRS 16, which it’s adopting this year. Key differences in last year’s numbers are shown in the table below.
|
2018/19 |
PBT |
EPS |
DPS |
|
Pre-IFRS 16 |
£635m |
22.0p |
11.0p |
|
Post-IFRS 16 |
£601m |
20.7p |
11.0p |
|
Difference |
-£34m |
-1.3p |
0.0p |
On 5 November, the company also updated its analyst consensus page from pre-IFRS 16 forecasts of 28 June to post-IFRS 16 forecasts, as shown in the table below.
|
Consensus forecast 2019/20 |
PBT |
EPS |
DPS |
|
Pre-IFRS 16 |
£632m |
21.6p |
10.6p |
|
Post-IFRS 16 |
£584m |
19.7p |
10.1p |
|
Difference |
-£48m |
-1.9p |
-0.5p |
Looking at the significantly larger negative numbers in the forecast 2019/20 ‘difference’ line than in the restated 2018/19 results, I’d suggest what we’re looking at here is another backstairs managing down of ‘market expectations’, wrapped up in the change to IFRS 16.
I wouldn’t be surprised to see a further massaging down of this year’s numbers, and I wouldn’t trust current fiscal 2021 forecasts (PBT £595m, EPS 20.2p and DPS 10.3p) as far as I could throw them. As such, this remains a stock to avoid, in my view.
