Shop for rich returns – in supermarkets
DURING the pandemic, UK households have done their level best to keep the fridge and larder stocked. Stuck at home, shoppers have spent £15billion more on groceries in the past year than in the one leading up to it, with total expenditure rising to some £135billion, according to market research group Kantar.
Habits have changed too, with online shopping accounting for more than 15 per cent of sales early this year, compared with less than 9 per cent this time last year.
Not long ago, such figures would have led to one inevitable conclusion – that the days of traditional supermarkets were numbered.
Food retailers spoke of owning too many outsized stores. They saw growth in smaller, convenience outlets instead. Recently, however, views have begun to change as industry experts have realised that large stores work for both digital and traditional shoppers.
General e-commerce wisdom suggests online shopping is at its best when goods are dispatched from centralised warehouses. Food retailing is different, however, because so much of it is perishable and profit margins are very low.
Smaller warehouses attached to existing stores are often more costeffective, allowing supermarkets to serve old-school and online customers from one site. As this realisation sets in, the big beasts of food retail are looking at their estates with new eyes, seeing big stores as key to their future rather than dinosaurs past their sell-by date.
Supermarket Income Reit is a prime beneficiary of this trend. The real estate investment trust owns a portfolio of large supermarkets across the country, chosen because they can offer home delivery, click and collect and a comprehensive, in-store range.
Sainsbury’s, Tesco, Morrisons and Waitrose are the main tenants and more than 80 per cent of leases are linked to the Retail Price Index, so rents rise by this measure of inflation each year.
That allows Supermarket Income to offer generous, sustainable dividends to shareholders. The shares are £1.09 and a 5.86p payout is forecast for the year to June, putting the stock on a yield of 5.3 per cent.
The company’s portfolio is valued at almost £1billion, with 27 stores owned outright and a further 26 co-owned with Sainsbury’s and the British Airways Pension Fund.
Over time, founders Ben Green and Steve Windsor are keen to buy those 26 sites outright, but there are plenty of nearer term plans for growth as well.
The duo are in the middle of a £100 million fundraise, issuing new shares at £1.06 apiece. The cash will be used to buy more supermarkets, with negotiations already under way on four sites and a further nine in the pipeline.
Not all will come off, but the former Goldman Sachs bankers like to ensure they deploy new money quickly so it is not sitting in a deposit account earning nothing.
Individual investors can buy the new shares via PrimaryBid, a whizzy online platform that gives small shareholders a look-in on flotations and fundraisings. The process is a little more cumbersome than buying direct from a broker, but it does avoid dealing fees and the stock ends up in investors’ existing broking accounts, such as Hargreaves Lansdown or AJ Bell.
Even on the open market, Supermarket Income Reit shares offer good, long-term value. Its tenants are top-quality businesses that have proved their mettle in the pandemic and should continue to deliver growth as Covid recedes.
Fewer meals will be eaten at home as life returns to normal. But many families are enjoying cooking and eating together, while millions of people hope to work from home for one or two days a week, which should mean higher grocery spending than pre-pandemic.
This is grist to the mill for Supermarket Income. The group even has green credentials, installing solar panels on supermarket roofs which should provide most of their electricity over time. Former Sainsbury’s boss Justin King is a senior adviser, sharing wisdom and industry contacts.
Traded on: Main market Ticker: SUPR Contact: supermarketincomereit.com or 020 3790 8087