The cost of living is on everyone’s mind, not surprisingly as almost everything costs more than it did a year ago. Inflation is close to 11 per cent, while grocery prices are 13 per cent higher than they were last winter.
Simply putting food on the table is substantially more expensive than it was, so much so that many pundits feared Christmas would be a nightmare for mainstream food retailers. The figures tell a rather different story. Supermarket giants Tesco and Sainsbury’s last week announced robust trading over the festive season, as shoppers dug into their wallets to celebrate with turkey and mince pies, luxury puds and top treats such as Belgian chocolate Yule logs and mulled cider glazed gammon.
Tesco like-for-like sales were nearly 8 per cent ahead in the seven weeks to January 7 and the group remains the top grocer by a country mile, accounting for more than 27 per cent of the market. Chief executive Ken Murphy admits that times are tough and likely to remain so but he believes Tesco will stay in poll position and he stands by earlier profit guidance.
Sainsbury’s delivered total sales growth of 7.1 per cent over the Christmas season, took market share from rivals and now accounts for almost 16 per cent of the grocery market. Expressing confidence in his business, chief executive Simon Roberts says that profits will be at the top end of expectations for the year to March.
Fast turnaround: Sainsbury’s is benefiting from buying Argos, with shoppers drawn to its four-hour delivery times
How are existing shareholders and potential investors supposed to interpret all this information? No one can deny that consumers are being squeezed, yet supermarkets seem relatively resilient and, over Christmas at least, shoppers were happily stocking up on premium ranges.
Yet brokers’ forecasts do not inspire confidence. Tesco profits are predicted to fall 8 per cent to just over £2billion in the year to February and dip further in the following 12 months. A dividend of 11p has been pencilled in for this year, maintained next year and the one after that.
At Sainsbury’s, a 6.5 per cent profits decline is forecast, to £685million for the current year, sliding to £645million in 2024. A 13.4p dividend is expected for this year, falling to 11.5p next year and remaining below 12p in 2025.
These numbers suggest City analysts expect UK consumers to be tightening their belts for at least the next two years, struggling to cope and cutting costs where they can.
Let’s hope these gloomy forecasts are wrong. Last Friday, better than expected economic figures suggested the UK may be hardier than the Jeremiahs fear. Up and down the country, there are pockets of optimism, too. Business owners admit that conditions are far from easy but many are still making progress, and are hopeful of economic recovery as the year progresses.
Tesco and Sainsbury’s should be in an even stronger position than smaller companies, using their size to ride out the economic storm. And, even though discount chains Aldi and Lidl are doing their best to grab market share, both account for less than 8 per cent of national grocery spend and are far less profitable than their UK peers.
Tesco and Sainsbury’s have also been upping their game in recent years. Tesco is determined to prove that it can offer value to customers and is using the Clubcard loyalty scheme to give shoppers more of what they want.
Sainsbury’s is striving to prove its value credentials too, while retaining a slightly more affluent image than its larger rival. The group also benefits from its ownership of Argos, which has been delivering the goods of late.
So, are these shares worth buying? In 2007, Tesco was trading at £4.78. Today, the stock is £2.46, having fallen about 15 per cent in the past year alone.
Sainsbury’s shares have suffered a similar fate. Before the financial crisis, they were more than £5.50. Today, they are £2.41, down from £2.90 a year ago.
Both stocks have been hit by increased competition, difficult economic circumstances and changes to shopping habits, which have forced them to look long and hard at the stores they own and the type of business they want to be in the future.
There is still work to be done but much of the hard graft has been completed. At current levels too, both stocks offer decent income, with Tesco delivering a 4.4 per cent yield and Sainsbury’s yielding 5.5 per cent.
Midas verdict: Tomorrow is Blue Monday, said to be the most depressing day of the year, with credit card and tax bills falling due, biting weather conditions and the warm glow of Christmas a distant memory. Come what may, however, everyone still needs to eat – and more than 40 per cent of the country buys their food at Tesco and Sainsbury’s.
Admittedly, the shares have been poor performers in recent years. But the businesses have been working hard to position themselves for a brighter future.
With Tesco at £2.46 and Sainsbury’s at £2.41, both shares should generate attractive long-term rewards, while the dividends add extra spice.
Traded on: Main market Tickers: TSCO & SBRY Contact: tescoplc.com or 0371 384 2977 and sainsburys.co.uk or 0333 207 6557
… and M&S could pay dividends
Remember when Marks & Spencer could do no wrong? When profits seemed to rise almost effortlessly from year to year and the business was a byword for success.
Those days seem a long way away. The shares have gyrated for the past three decades and, at £1.46, they are now worth less than they were in the early 1990s.
The company has been trying to regain its halo for years, egged on by millions of shoppers, particularly those of a certain age, who remember M&S in its glory days. But there have been successive mishaps – underinvestment in online shopping, tired-looking stores and dowdy clothes that failed to chime with the modern consumer.
The group has hired many a retail guru to try to move the business into the modern era. Last week chief executive Stuart Machin boldly suggested these efforts are bearing fruit.
Like-for-like sales rose 7.2 per cent in the three months to December 31, with revenues from clothing and home up almost 9 per cent and market share growing to more than 10 per cent – a sevenyear high.
The much-loved food division delivered growth of 6.3 per cent, but also gained market share, with shoppers particularly excited by both Remarksable bargains and the Collection luxury range. Machin, a career retailer who became chief executive last May, is clearly pleased with the figures.
Recognising that economic headwinds and cost pressures cannot be ignored, he seems confident that M&S can make progress by upping its game on the clothing front, upgrading stores, improving its online effort and cutting costs.
For long-suffering shareholders, recovery cannot come fast enough. Not only has the stock underperformed for years but the group paid its last dividend in January 2020.
There are hints that this could change when M&S reports annual figures in May.
The company has cut debt substantially, while sales and profits are well ahead of earlier lows.
City analysts now hope for a dividend of around 4.75p this year, rising to 5.2p in 2024.
Midas verdict: Marks & Spencer shares have consistently disappointed but there has been a shift in sentiment over recent months, with the stock rising from 93p to £1.46 since October. If Machin continues to deliver progress, the price should make further gains from here, while the prospect of dividend payments could further boost the stock. Existing shareholders should stick with the business. Brave investors may even choose to dip their toes in the water at current levels.
Traded on: Main market Ticker: MKS Contact: corporate.marksandspencer.com or 020 7935 4422