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It looks like the UK government’s latest Budget has affected it FTSE 100‘s J Sainsbury (LSE: SBRY).
In the past month, the price has fallen by around 15% and now sits below 252p, as I write on 8 November.
The media has been reporting that chief executive Simon Roberts has some concerns. He reckons the changes announced to employers’ National Insurance will add around £140m a year to the company’s tax bill.
In addition, the government has raised the minimum wage for many seniors. Roberts told reporters that lower profit margins in the supermarket industry would mean higher prices for customers. In other words, there isn’t enough meat in the company’s profits for Sainsbury’s to absorb the cost increases.
As a result, Roberts thinks the budget move could increase inflation.
A good business idea
It seems that all the uncertainty has caused the stock price to drop. But this situation could be a good opportunity for investors to pick up a few shares of J Sainsbury at a better price.
All supermarket businesses are in the same boat due to rising costs. So consumers will have to accept higher food prices everywhere they shop. My guess is that J Sainsbury will be able to maintain its profit margins in the coming months and years by increasing its retail prices.
Meanwhile, the company released its half-year results on November 7. Roberts said the food business is winning the market, it’s still going “strong” volume growth.
Directors have expressed a positive view of the business, and I don’t think the government’s Budget changes that over time.
However, City analysts expect average wages to fall by around 22% in the current trading year. After that, there is likely to be a 16% rollback by 2025.
Meanwhile, earnings estimates are rising with mid-single-digit percentage increases expected this year and next.
Defense sector
Looking ahead at that time, the expected yield will be a little over 5.7% next year. So that is a decent amount of income collected by the shareholders. I think the company has every chance of maintaining its profits in the coming years.
But there are risks for shareholders. The first is the low profit margin in the industry that Roberts is talking about. Some of the competition in this industry is fierce, which means that it takes a lot of effort to make every little profit.
However, the food sector has defensive features because people have to buy and eat food whatever the general economy might do. In addition, J Sainsbury has a good record of paying dividends, which shows that it is competitive in the industry.
With a projected dividend yield of more than 5%, the income may help compensate investors for the risk they take by holding the shares.
For that reason, I see J Sainsbury as well worth investors’ research time and consideration now.
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