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J Sainsbury’s (LSE: SBRY) share price rose 5% on the day of its 2025 results release. Since then, though, it has lost all this gain and more besides.
This might signal that it is trading on the cheap side. Or it could be a warning that the grocer is worth less than investors thought.
So, which is it?
How did the results look?
The numbers looked solid to me, if not spectacular.
Retail sales (excluding fuel) were up 4.8% year on year to £15.6bn. But underlying profit in this core business barely moved — just 0.2% higher at £504m.
Group-level measures looked stronger, with underlying profit before tax up 10% to £340m. And profit after tax more than doubled to £165m.
The contrast between huge sales and modest profit in the core retail business again shows how thin margins are in grocery retailing.
Upgraded outlook and shareholder rewards
Nonetheless, management lifted its full-year guidance, now expecting underlying retail operating profit of “over £1bn” rather than “around £1bn”.
Retail free cash flow is still forecast at more than £500m.
A positive surprise for shareholders was £400m being returned to them through a £250m special dividend and £150m share buyback.
These funds come from the sale of Sainsbury’s Bank to NatWest.
What’s the dividend yield outlook now?
Last year’s dividend of 13.6p equates to a 4.2% yield at today’s £3.21 share price.
This is comfortably above the present FTSE 100 average of 3.1%.
With the newly announced special dividend, the yield is forecast to jump to 6.4% this year.
After that, it is projected to drop to 4.8% in 2026/27 before rising to 5.2% the year after.
How are its earnings growth prospects?
Future share price and dividend growth depend on earnings.
A risk to Sainsbury’s is any worsening in the cost-of-living crisis. Indeed, chief executive Simon Roberts warned that consumers are likely to remain cautious ahead of the 26 November Autumn Budget.
That said, analysts still expect Sainsbury’s earnings to grow 7.1% a year to end-2027/28.
So, is the stock a bargain?
A stock’s price is simply the prevailing rate people are willing to pay for the shares. But its value reflects the fundamental worth of the business.
In my experience, big long-term profits can be made from exploiting this gap.
And the best way I have found of identifying it is through the discounted cash flow model. It pinpoints exactly where any stock should trade, using cash flow forecasts for the business to do so.
In Sainsbury’s case, it shows the shares are 18% undervalued at their current £3.21 price.
Therefore, their true worth (often termed ‘fair value’) is £3.91.
Will I buy them?
I think Sainsbury’s is one of the stronger players in the sector, balancing value lines with premium ranges. But the wafer-thin margins of supermarket retailing do not appeal to me.
Additionally, an 18% undervaluation could easily be accounted for by high market volatility in a relatively short time. So, it does not look especially cheap either in my view.
So, this stock is not for me.
Instead, I am looking at other high-quality, high-growth stocks trading at far steeper discounts to fair value.
