Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

WHETHER you’re a shopper or an investor the hunt is on for value. You want to know that what you’re paying for is worth it. And never have the two been so closely aligned as they are now as the cost of living crisis deepens and the very companies that can make or break peoples’ wallets are one and the same for consumers and investors.

Today Sainsbury’s (SBRY) profits may have doubled but tomorrow, who knows? With an expectation that cash-strapped shoppers will have no choice but to cut spending, the supermarket giant knows its fate is at least partially sealed.

According to the latest ONS data, around eight in 10 (83%) adults reported an increase in their cost of living in March 2022 (3 to 13 March 2022) compared with around six in 10 (62%) adults in November 2021 (3 to 14 November 2021).

Raw materials prices have risen and Sainsbury’s defence is that it’s been passing these price hikes on to customers at a slower pace than its rivals. But it doesn’t, frankly, have much more room for manoeuvre.

Sainsbury’s profits come as research shows the average food bill could increase by £271 this year. Grocery prices, already 5.9% higher in April than a year ago, are set to go higher still. As a result, Sainsbury’s has cut its profit forecast for this year. Tesco (TSCO) has already done the same.

So for now, from an investment point of view, has the grocery sector already reached its sell-by date?

The consensus target price on Tesco is 325p a share, with estimates ranging from 239p to 350p. The shares are currently trading around the 274p mark.

On the dividend front no real change is expected with 11p a share currently pencilled in by analysts who follow the stock.

Sainsbury’s is a similar story. Its shares are currently trading around 232p and the average 12-month price target is 279p, with forecasts going from 210p to 320p. Dividends are also expected to stay on track. Reassuringly, the supermarket has said it continues to expect strong cash flow and has pledged to increase the proportion of profits paid out to shareholders to 60% from around 53% at present. It added that it would consider share buybacks once the ratio of debt to profits had fallen.

Of course, Tesco and Sainsbury’s don’t exist in a ‘them and the customer’ bubble; the biggest financial injury has come in recent years from retaining profit margins at the cost of market share. That would be a lesson well learned now when consumers are going to be forced to shop for value and that would play heavily into the hands of cost-cutters, like their old rivals Aldi and Lidl.

The Big Four UK supermarkets now comprise two privately-owned companies, Wm Morrison and Asda, which does limit choice for investors. But people still need to eat, so that’s food for thought, at least.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

Share this article

Latest articles

Investing in the ways we pay

How global brands are getting in on the action


Graham Smith

Graham Smith

Investment writer

How to cash in on the great inflation squeeze

Trading down markets - from the cheaper brand of food you buy to taking fewer…


Tom Stevenson

Tom Stevenson

Fidelity International

The one loan you don’t need to rush to clear…

Student Loan new rules: 7% vs 12%


Nafeesa Zaman

Nafeesa Zaman

Fidelity International