Will shares in Sainsbury help you build a FTSE-beating retirement fund?
The last five years have been tough for those in retirement. Portfolio valuations have been hammered and annuity rates have plunged. There's no sign of things improving anytime soon, either, as the eurozone and the UK economy look set to muddle through at best for some years to come.
A great way of protecting yourself from the downturn, however, is by building your retirement fund with shares of large, well-run companies that should grow their earnings steadily over the coming decades. Over time, such investments ought to result in rising dividends and inflation-beating capital growth.
In this series, I'm tracking down the UK large-caps that have the potential to beat the FTSE 100 (UKX) over the long term and support a lower-risk income-generating retirement fund (you can see the companies I've covered so far on this page).
Today, I'm going to take a look at Sainsbury (J) (LSE: SBRY), one of the UK's top supermarket chains and a popular choice with income investors.
Bringing home the bacon
Sainsbury has performed reasonably well against FTSE 100 over the last 10 years, but has failed to consistently beat the index, as these figures show:
|Total Returns||2007||2008||2009||2010||2011||10 yr trailing avg.|
(Total return includes both changes to the share price and reinvested dividends. These two ingredients combined are what make it possible for equity portfolios to regularly outperform cash and bonds over the long term.)
Despite this, Sainsbury shares currently offer an attractive dividend income that's well above the FTSE 100 average and trade on a price-earnings ratio that's below the FTSE average. So could Sainsbury be a good retirement share to buy now?
What's the score?
To help me pinpoint suitable investments, I like to score companies on key financial metrics that highlight the characteristics I look for in a retirement share. Let's see how Sainsbury shapes up:
|5 year average financials|
Source: Morningstar, Digital Look, Sainsbury
Here's how I've scored Sainsbury on each of these criteria:
|Longevity||143 years can't be bad.||5/5|
|Performance vs. FTSE||Not bad but not outstanding; a safe bet.||3/5|
|Financial strength||Low margins but stable and consistent finances.||4/5|
|EPS growth||Adjusted earnings have grown steadily.||4/5|
|Dividend growth||Decent growth record, but slower each year.||4/5|
Sainsbury's 5-year average operating margin of 3.3% does not compare favourably to the 5% averages enjoyed by the company's big rivals, Tesco (LSE: TSCO) and Morrison (Wm) Supermarkets (LSE: MRW). However, Sainsbury does have an ace up its sleeve -- it has an impressive property portfolio that provides a solid, tangible underpinning to the company's share price. It also provides plenty of potential for fundraising should the business ever run short of cash.
In its most recent trading update, issued at the start of October, Sainsbury pleased investors with an impressive 1.9% increase in like-for-like sales and a 4.3% increase in total sales during the second quarter. This compares well to the recent performance of its rivals, especially Tesco, which only managed a 0.1% increase in UK like-for-like sales in the first half of this year.
A score of 20/25 is very attractive and puts Sainsbury in second position out of the three supermarkets I have reviewed so far in this series, behind Tesco but ahead of Morrisons. Overall, I think that Sainsbury could be an attractive retirement share and should certainly be a candidate if you are looking for a UK retail or supermarket share for your portfolio.
Doing your own research is important, but another good way of identifying great dividend-paying shares is to study the choices of successful professional investors.
One of the most successful income investors currently working in the City is fund manager Neil Woodford, who manages more money for private investors than any other City manager. Neil Woodford's dividend stock picks outperformed the wider index by a staggering 305% in the 15 years to 31 December 2011.
The good news is that you can learn about Neil Woodford's top holdings and how he generates such fantastic profits in this free Motley Fool report. Many of Mr Woodford's choices look like excellent retirement shares to me and the report explains how he chose some of his biggest holdings.
This report is completely free and I strongly recommend you download "8 Shares Held By Britain's Super Investor" today, as it is available for a limited time only.
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Further investment opportunities:
> Roland owns shares in Tesco but does not own any of the other shares mentioned in this article. The Motley Fool owns shares in Tesco.