ii view: income play Sainsbury's wields axe at Argos

This major food and general merchandise chain offers a future dividend yield of 6%, but the sector is super competitive. We assess prospects. 

First-half results to 17 September

• Revenue up 4.6% to £18.34 billion
• Pre-tax profit down 29% to £376 million
• Interim dividend up 22% to 3.9p per share
• Net debt down 3% to £6.17 billion

Guidance

• Full-year profit hopes unchanged at between £630 million and £690 million, down from £730 million last year

Chief executive Simon Roberts said

"Two years ago we launched our plan to put food back at the heart of Sainsbury's. We committed to improve shareholder returns by creating a simpler business and reducing costs to invest in lower prices, food innovation and maintaining colleague and customer satisfaction. 

“Profits are significantly higher than pre-Covid levels and we are generating strong cash flow, supporting debt reduction and dividend payments.”

ii round-up:

Founded in 1869, Sainsbury (J) (LSE:SBRY) today operates just under 600 supermarkets, 811 convenience stores and just over 715 Argos outlets in both stand-alone and supermarket locations.  

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The retailer also operates Sainsbury’s Bank.  

For a round-up of these latest results on 3 November, please click here.  

ii view:

FTSE 100 constituent Sainsbury's has a stock market value of around £5 billion compared with Tesco (LSE:TSCO) at £17 billion and Ocado Group (LSE:OCDO) at £6.5 billion. It employs over 170,000 people and owns brands such as Habitat, Tu and Nectar. It bought Argos in 2016, making it a major general merchandise retailer and bringing it into competition with the likes of B&M European Value Retail SA (LSE:BME). 

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For investors, rising interest rates, higher taxes, and a cost-of-living crisis offer a challenging backdrop. Rivals Morrisons and ASDA, both now under private equity ownership, are not standing still, while Sainsbury’s guidance for full-year profit of up to £690 million is well below last year’s £730 million.

On the upside, Sainsbury's is now halfway through a £1.3 billion cost saving programme, with its stand-alone Argos store estate still being reduced and in-store and collection point numbers being expanded. Around 50 Argos standalone stores are expected to close this financial year and around 25 open inside Sainsbury's supermarkets. A digital push at its banking business continues and it has paid its first dividend of £50 million to the group during this latest half. Its ratio of net debt to adjusted profit has fallen to 2.9 times from 3.3 times a year ago.  

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On balance, and despite room for near-term caution, a defensive food offering and an estimated dividend yield of 6% should keep income investors happy until economic conditions improve.

Positives: 

• A cost saving programme ongoing
• Attractive dividend payment (not guaranteed)

Negatives:

• Rising costs
• Intense sector competition

The average rating of stock market analysts:

Hold