Funds still stocking up on grocers
BILLION-pound write offs, accounting scandals, Serious Fraud Office swoops, crumbling share prices, wounding attacks by nimble upstart rivals…. the conveyor belt of bruising blows for Britain’s biggest supermarkets has been relentless.
On Wednesday, Tesco shocked the City with a £6.4bn pre-tax loss – its worst performance in nearly a century of selling groceries.
The following day, a cost-cutting drive by Sainsbury’s revealed it would slash 800 jobs as part of its bid to save £500m over the next three years.
And earlier this month, German discounter Aldi nudged ahead of posh favourite Waitrose to become the UK’s sixth biggest supermarket chain.
Aldi now has 5.3pc of the market – close to fifth-placed Co-op (6pc) but still some way off Morrisons (10.9pc) in fourth.
Together with Lidl, the two German discounters share 9pc of the market. Three years ago, they served just 5.4pc. This comes on top of the industry’s well-documented struggles to survive and adapt.
Tesco’s woes include last year’s ‘mis-stating of profits’ – an accounting irregularity which sparked an ongoing criminal probe by the Serious Fraud Office – and loss of customers, market share and sales thanks to fierce price competition from Aldi and Lidl.
Also battling to stave off further damage done by discounters, Sainsbury’s has been forced to drop prices and watch its stock price tumble by a fifth. Morrisons is wrestling with its own demons. Late to roll out a string of convenience stores, it is trying to catch up with bigger rivals but has seen sales slump amid upheaval with a boardroom cull.
All have also been hampered by deflation in food commodities because of better than expected harvests globally.
And some analysts warn they face further pressure from chains such as Poundland that sell big-name shower gels and toiletries for £1.
Budget- conscious families are increasingly happy to abandon the old weekly shop for several smaller outings to different chains which offer the best value.
Many shoppers make a convenient trip to Poundland to buy 20 bottles of shampoo at a massive discount. So investors tired of the turmoil could be forgiven for wanting to check out.
But fund managers and brokers continue to put the case for keeping your money invested in the nation’s grocers – and stress that in the long haul it may pay off.
Richard Buxton, who runs Old Mutual’s UK Alpha fund, has bought just one stock this year: Tesco. He originally sold the shares in 2010 at £4.25 and recently bought them back at £1.75.
He says: ‘It’s going to be a long haul but the new chief executive Dave Lewis is doing all the right things.’
Kevin Murphy, fund manager of Schroder Income fund, says: ‘We’re still backing the industry, holding all three stocks – Tesco, Sainsbury’s and Morrisons.’
Part of supermarkets’ appeal lies in their dividend payouts – and his- torically, these have been robust.
Last year, Sainsbury’s total dividend for the 12 months was 17.3p per share – up steadily from 14.2p in 2010. Over the same period, Morrison’s rose from 9.6p to 13p.
Despite the divi cuts, the yield is not being hit as hard because the share prices have fallen so low.
Forecast dividend yields over the next year are 3.95pc for Sainsbury’s, 3.35pc at Morrisons and just 0.93pc at Tesco’s, says Hargreaves Lansdown. But others remain less convinced.
Justin Cooper, chief executive of Shareholder Solutions, says: ‘In the supermarket sector, the dividend pay- outs are vulnerable. ‘Shareholders are bearing the cost of the sector’s price war.’ Nicolas Ziegelasch, head of equity research at broker Killik & Co, says: ‘The risk of investing in the supermarket sector has increased markedly over the past few years, with the long-term impact of the discounter price disruption not yet clear.’
Although Warren Buffet admitted he’d made a mistake by buying Tesco, most fund managers are content to still stay put with Britain’s biggest retailer – the bellwether for the sector.
Patience, they say, is the order of the day but they’re watching how L e wi s grapples wi t h the turnaround.