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It seems that the recent UK government budget has affected the FTSE 100's J Sainsbury (LSE: SBRY).
Over the last month the share price has fallen by around 15% and now sits at just under 252p, as I write on 8 November.
The media has reported that chief executive Simon Roberts has some concerns. It believes the announced changes to employers' National Insurance will add around £140m a year to the company's tax bill.
On top of that, the government increased the minimum wage for most adults. Roberts told reporters that low profit margins in the supermarket industry will mean prices will rise for customers. In other words, there is not enough meat in the company's profits for Sainsbury's to absorb the cost increases.
That's why Roberts believes the budget changes will likely stoke inflation.
A positive outlook for the business
It seems like all the uncertainty has caused the stock price to fall. But this situation can be a good opportunity for investors to buy some J Sainsbury shares at a better valuation.
All supermarket companies are in the same boat due to rising costs. Therefore, consumers will likely have to absorb higher food prices everywhere they shop. My guess is that J Sainsbury will be able to preserve its profit margins in the coming months and years by increasing its selling prices.
Meanwhile, the company released its half-year results on November 7. Roberts said the food business has been gaining market share, with continued “strong” volume growth.
The directors expressed a positive outlook for the business and I don't think the government's Budget will change that in the long term.
However, City analysts expect normalized profits to fall by around 22% in the current business year. After that, a recovery of around 16% is likely during 2025.
Meanwhile, estimates for the dividend are optimistic, with mid-single percentage increases projected for this year and next.
A defensive sector
Looking ahead, then, the expected return stands at just over 5.7% for next year. So that's a decent amount of income that shareholders can raise. I believe that the company has every chance of maintaining its dividend in the coming years.
But there are risks for shareholders. The first is the low profit margins in the industry that Roberts talks about. Another is the fierce competition in the sector, which means it takes a lot of effort to make every meager profit.
However, the food sector has defensive characteristics because people should buy and eat food regardless of what the overall economy is doing. On top of that, J Sainsbury has a good track record of paying dividends, which shows that it is competing well in the industry.
With the projected dividend yield well above 5%, the income can help compensate investors for the risks they take by holding the stock.
For that reason, I think J Sainsbury also deserves investors' additional research time and consideration now.
