The J Sainsbury (LSE: SBRY) share price remains steady, even though the UK supermarket giant is the latest to report pressure from escalating price wars.
With full-year results for the year to March 2025, the company said it expects no growth in retail underlying operating profit in the 2025-26 year. The year just ended brought in £1,036m. But Sainsbury only expects to report about the same again for the coming year.
Price wars
In March Asda launched a new campaign cutting the prices of around 1,500 lines to try to win back falling sales. Since then Tesco spoke of “a further increase in the competitive intensity of the UK market” in its FY results release. It says it expects adjusted operating profit to dip in 2025-26.
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Still, at least Sainsbury isn’t predicting a fall in profit as Tesco is. And I reckon that shows a benefit from its slightly more elevated market position, where it isn’t slugging it out for the lowest of the low in pricing.
Investors don’t seem too fazed by the competition threat. The Sainsbury’s share price initially rose 4% when the market opened. As I write it’s softened to about 1.5% ahead. That’s not much, but it’s positive.
We might see a flat period this year. But it would be on the back of a very solid 2024-25. And I still rate it as a relatively positive outlook for a company in such a pressured sector.
Profit and cash
That £1,036m retail underlying operating profit represents a 7.2% rise on the previous year. Total underlying profit before tax jumped 8.6% to £761m. Underlying earnings per share saw a slightly smaller, but still welcome, 4.5% gain.
But here’s where I think Sainsbury could stand out for long-term dividend investors.
Retail free cash flow of £531m enabled the company to lift its full-year dividend by 3.8%. That’s nicely above the UK’s slowing inflation rate. The past year also gave shareholders a boost in the form of a £200m share buyback.
Plans for 2025-26 include further buybacks of at least another £200m. And we should see a special dividend, funded by bank disposal proceeds of £250m. Is this looking like a cash cow, or what?
Danger ahead?
Debt can be one of the biggest killers of long-term dividend prospects. And at first glance, I wasn’t too chuffed to see net debt at Sainsbury rise by £204m over the year to £5,758m.
But looking closer, that includes lease liabilities, which are really just a commitment to future spending. Excluding lease liabilities, net debt drops to just £264m. That doesn’t worry me in the slightest.
There are still risks ahead for Sainsbury in today’s uncertain market. The company might not expect to be hit too hard by price competition in the coming year. But if we’re in the kind of long cut-price war we’ve seen in the past, that could hand a big advantage back to Tesco.
Still, with a forecast dividend yield now up to 5.2%, Sainsbury has to be worth serious consideration for income investors.
