Is Sainsbury the Ultimate Retirement Share?

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LONDON -- The last five years have been tough for those in retirement. Portfolio valuations have been hammered, and annuity rates have plunged. There's no sign things will improve anytime soon, either, as the eurozone and the U.K. economy look set to muddle through at best for some years to come.

A great way to protect yourself from the downturn, however, is to build your retirement fund with shares of large, well-run companies that should grow their earnings steadily over the coming decades. Over time, such investments ought to result in rising dividends and inflation-beating capital growth.

In this series, I'm tracking down the U.K. large caps that have the potential to beat the FTSE 100 over the long term and support a lower-risk, income-generating retirement fund (you can see the companies I've covered so far on this page).


Today, I'm going to take a look at Sainsbury (ISE: SBRY.L) , one of the U.K.'s top supermarket chains and a popular choice with income investors.

Bringing home the bacon
Sainsbury has performed reasonably well against the FTSE 100 over the last 10 years but has failed to consistently beat the index, as these figures show:

Total Return

2007

2008

2009

2010

2011

10-Year Trailing Average

Sainsbury

6.4%

(19.8%)

2.6%

20.8%

(15.4%)

4.4%

FTSE 100

7.4%

(28.3%)

27.3%

12.6%

(2.2%)

7.7%

Source: Morningstar. (Total return includes both changes to the share price and reinvested dividends. These two ingredients combined are what make it possible for equity portfolios to regularly outperform cash and bonds over the long term.)

Despite this, Sainsbury shares currently offer an attractive dividend income that's well above the FTSE 100 average and trade on a price-earnings ratio that's below the FTSE average. So could Sainsbury be a good retirement share to buy now?

What's the score?
To help me pinpoint suitable investments, I like to score companies on key financial metrics that highlight the characteristics I look for in a retirement share. Let's see how Sainsbury shapes up:

The basics

Year founded

1869

Market cap

6.7 billion pounds

Net debt

2 billion pounds

Dividend yield

4.5%

Five-year average financials

Operating Margin

3.3%

Interest Cover

5.3 times

EPS Growth

19.9%

Dividend Growth

13.5%

Dividend Cover

1.8 times

Source: Morningstar, Digital Look, Sainsbury.

Here's how I've scored Sainsbury on each of these criteria:

Criterion

Comment

Score (out of 5)

Longevity

143 years can't be bad.

5

Performance vs. FTSE

Not bad, but not outstanding; a safe bet.

3

Financial strength

Low margins, but stable and consistent finances.

4

EPS growth

Adjusted earnings have grown steadily.

4

Dividend growth

Decent growth record, but slower each year.

4

 

 

Total: 20/25

Sainsbury's five-year average operating margin of 3.3% does not compare favorably with the 5% averages enjoyed by the company's big rivals, Tesco and Morrison (Wm) Supermarkets. However, Sainsbury does have an ace up its sleeve: It has an impressive property portfolio that provides a solid, tangible underpinning to the company's share price. It also provides plenty of potential for fundraising should the business ever run short of cash.

In its most recent trading update, issued at the start of October, Sainsbury pleased investors with an impressive 1.9% increase in like-for-like sales and a 4.3% increase in total sales during the second quarter. This compares well to the recent performance of its rivals -- especially Tesco, which only managed a 0.1% increase in U.K. like-for-like sales in the first half of this year.

A score of 20/25 is very attractive and puts Sainsbury in second position out of the three supermarkets I have reviewed so far in this series, behind Tesco but ahead of Morrisons. Overall, I think Sainsbury could be an attractive retirement share and should certainly be a candidate if you are looking for a U.K. retail or supermarket share for your portfolio.

Expert selections
Doing your own research is important, but another good way to identify great dividend-paying shares is to study the choices of successful professional investors. One of the most successful income investors currently working in the City is fund manager Neil Woodford, whose dividend stock picks outperformed the wider index by a staggering 305% in the 15 years to the end of 2011. You can learn about Neil Woodford's top holdings and how he generates such fantastic profits in this free Motley Fool report. I strongly recommend you download "8 Shares Held By Britain's Super Investor" today, as it is available for a limited time only.

Warren Buffett buys British! The legendary investor has recently topped up on his favorite U.K. blue chip. Discover what he bought -- and the price he paid -- within our latest free report!

Further investment opportunities:

The article Is Sainsbury the Ultimate Retirement Share? originally appeared on Fool.com.

Roland owns shares in Tesco but does not own any of the other shares mentioned in this article. The Motley Fool owns shares in Tesco. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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