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The UK government’s latest budget appears to have had an impact FTSE100‘S J. Sainsbury (LSE: SBRY).
As I write on November 8, the share price has fallen by around 15% in the last month and is now just under 252p.
News outlets report that CEO Simon Roberts has some concerns. He believes the announced changes to employers’ national insurance will add around £140m a year to the company’s tax bill.
In addition, the government raised the minimum wage for most adults. Roberts told reporters that low profit margins in the supermarket industry will mean higher prices for customers. In other words, the company’s profits are not enough for Sainsbury’s to cover the augment in costs.
For this reason, Roberts believes that changes to the budget are likely to accelerate inflation.
Positive prospects for business
It appears that all the uncertainty has caused the share price to drop. However, this situation could be a good opportunity for investors to buy some J Sainsbury shares at a better valuation.
All supermarkets are in the same boat with rising costs. So consumers will likely have to accept higher food prices wherever they shop. I assume that J Sainsbury will be able to maintain profit margins in the coming months and years by increasing its selling prices.
Meanwhile, on November 7, the company published its half-year results. Roberts said the food industry continues to gain market share “strong” volume augment.
Executives have expressed a positive outlook for the business and I don’t think the state budget will change that in the long run.
However, City analysts expect normalized profits to decline by around 22% in the current financial year. Then in 2025 there will likely be a rebound of around 16%.
Meanwhile, dividend estimates are hopeful, with mid-single-digit percentage growth forecast for this year and next.
Defensive sector
So, looking ahead, the expected profitability next year will be just over 5.7%. So this is a decent amount of income for shareholders to collect. I believe the company has every chance of maintaining its dividend in the coming years.
However, there are risks for shareholders. The first is the low profit margins in the industry Roberts is talking about. Another is that the industry is fiercely competitive, which means it takes a lot of effort to make every modest pound of profit.
Nevertheless, the food sector is defensive in nature because people need to buy and eat food regardless of what is happening in the economy. Moreover, J Sainsbury has a good record of dividend payments, which shows that it competes well in the industry.
With a projected dividend yield well above 5%, the yield could support compensate investors for the risk they take in owning the stock.
For this reason, I believe J Sainsbury is worth further research and investor consideration at this time.