Are defensive shares back on the menu? With economic projections looking gloomy and talk of a recession not far from people’s lips, companies with products folk buy through thick and thin might outperform. And even better if they offer a decent dividend along with the main course. Shares that might fit the bill include the nation’s second biggest supermarket, Sainsbury’s (LSE: SAIN).
A £10k stake
Recent performance from the shares has been mediocre. A stake bought two years ago is only up 2.7% in value. I could have earned more through a savings account. Tesco is up 50% by comparison. It’s not been a great time for existing Sainsbury’s shareholders but it could mean a buying opportunity.
Then there is the question of dividends. Sainsbury’s pays a 5.11% yield, going from the last 12 months, one of the higher payers on the FTSE 100. It’s no flash in the pan, either. A dividend has been paid every year since 2007. Such a weighty payout can make a static share price less of an issue.
That 1.7% increase over two years becomes 13.96% when looking at total return (dividends reinvested). A £10,000 stake turns into £11,396, which is the attraction of this kind of dividend stock.
Sainsbury’s is coming off a “best ever Christmas” too. The festive period is a busy one for the big shops and CEO Simon Roberts was happy to announce winning “market share for the fifth consecutive Christmas”. This is great stuff in such a competitive sector. With budget options like Lidl, Aldi, or even Tesco snapping at the heels at one end, and prestige supermarkets like Waitrose and Marks and Spencer at the other, it’s a very good sign that Sainsbury’s is holding its ground in the middle.
A squeeze
The big news Sainsbury’s is grappling with is, of course, the bump in Employer’s National Insurance. This cost affects almost all companies, but it disproportionately affects supermarkets where the twin issues of wafer-thin margins and a large workforce put the squeeze on at both ends.
Management has mooted a £148m tax bill against net income of around £1bn. I doubt many other firms will be dealing with such a large slice taken out of their profits. Investors aren’t too pleased either – the shares dropped like a stone after the Budget and are still 13% down as I write.
The response has been to axe 3,000 jobs, including 20% of senior management, along with closing its in-store cafes. That might help the bottom line a bit but cutting services is not what I’m hoping to see, not to mention the human cost of so many people being put out of work.
That’s probably the key question when it comes to my own decision. I like the defensive properties of the supermarket sector – I have some exposure already – and I suspect it will be a strong performer in a seemingly grim economic period. But I don’t think there’s enough in Sainsbury’s for me to buy in today.
This post was originally published on Motley Fool
