Despite the recent significant price increases of many stocks and broad indices in markets around the world, there are still stocks that offer value. One of those markets we believe is the UK, which is still down around 14% year-to-date (YTD).
Among the FTSE 100 stocks that provide a significant margin of safety are several food retailers and supermarkets. Two such stocks are J Sainsbury (LON 🙂 (OTC 🙂 and WM Morrison Supermarkets (LON 🙂 (OTC :).
While the industry may not sound exciting, it has proved defensive during the pandemic. Most of the UK still follows strict social distancing measures; a large number of households are likely to spend money on food and related items during the holiday season.
In the UK, Sainsbury and Morrisons are household names, along with the two other FTSE 100 grocery mates – Tesco (LON 🙂 (OTC 🙂 and Ocado (LON 🙂 (OTC :). Therefore, we believe the two groups deserve further due diligence. Let's take a closer look.
J Sainsbury
London-based J Sainsbury is active in a variety of segments, including retail, financial services and real estate investment. Still, it is best known for its supermarket operations, which are the largest contributors to revenues.
So far in the year SBRY shares are up about 3%. On December 17, they closed at 227.7p (or $ 12.40 for US-domiciled stocks). The current price supports a dividend yield of about 4.5%.
In early November, the group also released a strategy update. Total sales were £ 14.93 billion (or $ 20.37 billion), down 1.1% year-over-year (year-on-year).
On the other hand, sales of groceries and general merchandise increased by 8.2% and 7.4% respectively. Investors were pleased to see digital sales up 117%, about 40% of total sales. Underlying profit before tax was £ 301 million (or $ 409 million).
CEO Simon Roberts summed it up as follows:
“ Years of investment in digital technology and technology have laid the foundation for us to be flexible and adapt quickly because customers had to shop differently. About 19% of our sales were digital this time last year, and nearly 40% of our sales today are digital. While we are working hard to help fuel the nation through the pandemic, we have also spent time thinking about how we can take care of our customers and our shareholders in the long term. "
Analysts noted that the retailer focuses on reducing costs and increasing online sales, especially groceries.
In fact, management announced forthcoming changes to the operational structure. For example, it will close four of the five independent Argos stores that are catalog sellers. But a large number of collection points will be added to Sainsbury supermarkets.
The group is also likely to sell its banking division, where profits have come under pressure due to record low interest rates.
In November, it issued a special dividend of 7.3p (or 9.9 cents) and an additional interim dividend of 3.2p (or 4.3 cents). The forward P / E and P / S ratios of SBRY shares are 11.93 and 0.19, respectively. While the stock price can be volatile as management implements these plans towards a leaner organization, we like stocks around these valuation levels.
WM Morrison Supermarkets
Our next supermarket chain is Morrison headquartered in Bradford, whose history dates back to 1899. It has nearly 500 stores in the UK and a robust online delivery service.
The group also has a supply partnership with Amazon's UK operations (NASDAQ :). In many parts of the country, Morrison's Amazon Prime customers can have same-day grocery delivery for free. The rumor mill says Amazon could eventually invest in or acquire Morrison.
Year-to-date, MRW shares are down 8%. On December 17th they closed at 177.3p. ($ 2,485 for US-domiciled stocks). The current dividend yield is approximately 3.7%.
The group announced in early September. Sales were £ 8.73 billion (or $ 11.87 billion), down 1.1% year-on-year.
Management pointed to the adverse effects of the pandemic on low fuel demand and sales. In fact, total sales excluding fuel were up 8.8% to £ 7.55 billion (or $ 10.27). Analysts noted that the capacity of online orders increased fivefold.
The company announced an interim dividend of 2.04p (or 2.77 cents), an increase of 5.7% from a year ago. However, the decision on a special dividend was delayed.
The forward price-earnings ratio and the price-earnings ratio of MRW shares are 12.56 and 0.24, respectively. Of the four grocery stores affiliated with the FTSE 100, Morrison stocks were sometimes considered the underdog. However, given the partnership with Amazon, we believe the company will be able to create increasing shareholder value in the coming quarters.
