Things are getting worse and worse in the supermarket sector. Last week, Sainsbury’s (LSE: SBRY) told investors that its sales had fallen again during the last three months. Competition remains fierce, while bumper harvests mean that food prices are falling.
An increasing number of City analysts are now predicting that Sainsbury’s will follow Tesco and cut its dividend.
Some are even more gloomy, saying that the value of its supermarkets will be written down and that it could even ask shareholders for more money. Given this backdrop, it’s not surprising that Sainsbury’s shares are down by more than a third this year.
So, can Sainsbury’s shares go much lower? Of course they can – especially if it has to resort to a rights issue. But I’m not convinced that Sainsbury’s finances are that bad. Its profits could halve and it will still be able to pay its rents and debt interest.
I’ve been too bullish on Sainsbury’s shares, but Sainsbury’s still looks like the pick of this hated sector. It has a very strong convenience store and online business and its ‘Basics’ range is the cheapest in the UK.
You don’t need to own supermarket shares, but one day the tide will turn. When it does, Sainsbury’s may be a share to own.
Verdict: one for the watch list