Why Sainsbury’s shareholders shouldn’t cash in just yet

 

Sainsbury’s shares are like those buy one get one free multi-buy bargains supermarkets are so fond of when compared to the near 600p the Qataris came close(ish) to paying for the grocer in 2007.

Given that, and the departure of superstar chief executive Justin King, it should come as no great surprise that speculation about their return, albeit at a more modest price, is now rife. 

Mr King has not done a Sir Terry. Sainsbury’s might be facing challenges but the business is still in far better shape to meet them than Tesco proved to be after Philip Clarke took over. All the same, those challenges are formidable. 

Sainsbury briefly overtook Asda in terms of sales over Christmas, for the first time in a decade. Since then, however, its rival has roared back; sensing the threat from discounters Aldi and Lidl Asda turned itself into one and backed by Wal-Mart’s billions it’s a threat to the lot of them. 

Rather than fighting a battle it couldn’t win, and which could have bruised its upscale brand, Sainsbury has shown some imagination by partnering with Netto to set up a discounter of its own. 

During its last foray on to these shores the Danish chain proved that you have to do more than offer rock bottom prices to make a success of things, and ended up selling out to, you’ve guessed it, Asda. It stands a better chance this time with Sainsbury’s expertise at hand.

Questions have been raised about the new team up, not least over where the pair will site the stores should their venture prove successful enough to venture beyond its initial beachhead in the north. 

The answer to that one is simple: Wherever there’s a sensible space at the right price. And if that’s a short walk from a Sainsbury’s so be it. They sit in different market sectors, and if cannibalisation of customers is a still worry it’s surely better than losing then to an Asda. 

Of course, it’s not just the discounters Sainsbury’s has to worry about. It’s non food offering could do with a bit of vim. Ditto for online. But those are problems that are fixable. 

Shareholders might look back to that 600p bid with misty eyes, but they’ve still done really rather well by shopping at Sainsbury’s, not least thanks to its reliably chunky dividend. The prospective yield - at a more than healthy 5 per cent - is not to be sniffed at even if it won’t improve much while the price war is in effect. 

As Mr King bids adieu the significant uncertainty facing the business may still make an offer tempting to some investors. But if the Qataris come a-calling they should stay their hands and consider what they would be losing. 

Blue chip businesses of Sainsbury’s quality aren’t all that common amidst the morally bankrupt banks and foreign natural resources giants that hold sway over the FTSE 100. Having the grocer around is in the long term interests of pension funds, and those who save through unit trusts and ISAs because what would you replace it with? Another Kazakh copper miner? 

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