Why Sainsbury’s new dividend policy underwhelmed City

Enhanced rewards for Sainsbury (J) (LSE:SBRY)’s shareholders of a £200 million buyback and progressive dividend policy today failed to revive shares after their poor start to the year.

The “Next Level” strategy presentation by chief executive Simon Roberts included more cost savings than expected but underwhelmed the City in terms of capital returns.

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Shares fell 9.9p to 265.7p, taking the decline so far this year to more than 10% and leaving the FTSE 100-listed grocer back where it was at the start of 2023.

Morgan Stanley said the buyback figure compared with its £250 million estimate and that guidance for retail cash flow of at least £500 million a year was also short of hopes.

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The update on “enhanced” shareholder returns included a switch to a progressive dividend from the next financial year, having previously based payouts on 60% of underlying earnings. The award for the 2022-23 financial year was an unchanged 13.1p share.

The supermarket’s new three-year plan builds on the momentum of its "Food First" strategy, with a focus on driving further grocery volume market share, deeper engagement with its Nectar loyalty program and greater frequency and spend at Argos.

Its renewed Save to Invest program is set to deliver £1 billion of structural cost reductions over three years to the 2027 financial year, including from technology and automation.

Sainsbury’s is targeting over £1.6 billion retail free cash flow in the three years, with capital expenditure up to £850 million a year and with scope for a share buyback of £200 million.

UBS, which has a “neutral” stance on the stock, said it sees a path of profitable growth in the context of a rational industry going through a period of margin repair.

It added: “While unlikely to drive immediate or large consensus upgrades, we see the positive in the underlying free cash flow and the quality of it, helping a reappraisal of the investment thesis of both Sainsbury’s and the sector.”

Morgan Stanley, which has a price target of 290p, said: “Overall we think the goals are a natural evolution building on the work done so far and have strong strategic rationale.”

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Today’s selling pressure also impacted rival Tesco (LSE:TSCO), which fell 8.1p to 281.8p as the supermarket pair joined deal-making Barratt Developments (LSE:BDEV) at the top of the FTSE 100 fallers board.

Paper-packaging giant Smurfit Kappa Group (LSE:SKG) led the top flight after including a 10% dividend increase in its last annual results before the completion of its merger with US-based WestRock.

Underlying earnings fell 12% to 2.08 billion euros (£1.77 billion), but with a broadly unchanged margin of 18.5% the results were still the second best in the company’s 90-year history.

Tony Smurfit, who will lead the new Smurfit WestRock venture once the deal completes in the second quarter of this year, told investors he is increasingly excited about the potential of the combination after taking a closer look at some of WestRock’s facilities.

The merged company will have its primary listing in New York, with the switch to the standard segment of the London market meaning Smurfit will drop out of the FTSE 100 index.

Smurfit said: “Our 2023 results again demonstrate Smurfit Kappa’s proven capacity to perform across all market conditions. While there are, and will always be, challenges in the macro environment, we look forward to the year ahead with confidence and excitement.”