FTSE 100

Why has the Sainsbury’s share price outperformed the FTSE 100 index in the past 6 months?

Could the Sainsbury’s share price (LON: SBRY) stay ahead of the FTSE 100 index (INDEXFTSE: UKX) in the long run?

The Sainsbury’s share price (LON: SBRY) has significantly outperformed the FTSE 100 index (INDEXFTSE: UKX) over the past six months. The retailer’s stock has gained 31%, while the index is up by 6% over the same period.

In my view, investor sentiment towards Sainsbury’s shares has improved because of a stronger outlook for the business. Consumer confidence has returned to pre-pandemic levels and the economic outlook for the UK has improved.

For example, the UK economy is expected to grow by around 6% this year and by a further 4.4% next year. With record savings amassed during lockdown, this could prompt rising sales figures across the FTSE 100 and FTSE 250 retail sectors.

Online opportunities for Sainsbury’s

In addition, the Sainsbury’s share price may have been buoyed by its online exposure at a time when digital sales growth has been strong. Although buying groceries online was an established trend prior to Covid-19, it has been accelerated so that around a quarter of all retail sales are now conducted online.

Since Sainsbury’s has longstanding exposure to the online grocery market in the UK, as well as its general retail operations via Argos, it appears to be in a strong position to capitalise on rising digital demand.

At the same time, some of its peers that provided fierce competition in recent years, such as Aldi and Lidl, do not have a wide online presence. This may mean Sainsbury’s has a stronger growth outlook than it has done in the past as a result of its relatively dominant market position in the fast-growing online retail space.

Share price valuation

Clearly, Sainsbury’s share price could experience challenges in future. Indeed, Covid-19 cases continue to be relatively high and, should they lead to increasing hospitalisations, containment measures may cause disruption to the wider retail sector. Similarly, supply issues may cause investors to demand a wider margin of safety.

However, trading on a price-earnings ratio of 17 and forecast to deliver a 6% annualised growth rate in earnings over the next two financial years, I believe the company’s shares could offer good value for money relative to the wider FTSE 100 index.

Furthermore, they currently have a dividend yield of 4.1%, versus a yield of 3.3% for the FTSE 100. This could mean they offer a relatively broad appeal in an era of low interest rates – especially since dividend payouts are expected to be covered 1.4 times by net profit in the current financial year.

Sainsbury’s shares have also been subject to bid rumours and speculation over recent months that may have catalysed their performance. Whether a bid emerges or not, the company’s long-term prospects could be relatively sound when compared to many of its FTSE 100 index peers.

Not Investment Advice Note: Views expressed are those of the writer. The author does not own any stocks mentioned. The article is information, not advice. Share prices can rise and fall. Past returns are not a guide to the future. Please do your own research.

Join the conversation