Is Sainsbury The Ultimate Retirement Share?

Published in Company Comment on 15 October 2012

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 Returns2007200820092010201110 yr trailing avg.
FTSE 1007.4%-28.3%27.3%12.6%-2.2%7.7%

Source: Morningstar

(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:

Year founded1869
Market cap£6.7bn
Net debt£2.0bn
Dividend Yield4.5%
5 year average financials
Operating margin3.3%
Interest cover5.3x
EPS growth19.9%
Dividend growth13.5%
Dividend cover1.8x

Source: Morningstar, Digital Look, Sainsbury

Here's how I've scored Sainsbury on each of these criteria:

Longevity143 years can't be bad.5/5
Performance vs. FTSENot bad but not outstanding; a safe bet.3/5
Financial strengthLow margins but stable and consistent finances.4/5
EPS growthAdjusted earnings have grown steadily.4/5
Dividend growthDecent growth record, but slower each year.4/5
Total: 20/25

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.

Expert selections

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.

Warren Buffett buys British! The legendary investor has recently topped up on his favourite UK blue chip. Discover what he bought -- and the price he paid -- within our latest free report!

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.

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The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

goodlifer 16 Oct 2012 , 12:42am

Please lei me know a bit more about Neil Woodford, the guy you keep trying to sell.
What's he actually achieved?

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