Sainsbury’s and Taylor Wimpey

“At 6,905 the FTSE 100 is now trading at its highest level since the start of December as the market does its best to climb out of a hole. The blue chip index is up 2.6% year-to-date which sends hope to investors that market weakness seen in the second half of 2018 may not necessarily turn into a sustained downward trend. “Housebuilders, tobacco, miners, engineers and retailers all look strong on the London market on Wednesday. The rest of Europe and Asia also pushed ahead, following similar strength on the US market last night. “Hopes of progress with US-China trade talks are certainly giving markets support, so too a lack of major shocks among corporate trading updates in general,” says Russ Mould, Investment Director at AJ Bell.

Sainsbury’s

“Sainsbury’s chief executive Mike Coupe says Christmas came late for the supermarket, yet one wonders if it happened at all given a miserable 1.1% drop in third quarter like-for-like sales.

“General merchandise sales which include Argos looked really weak with a 2.3% decline in the period and margins also remained under pressure.

“The big question now is what will happen to Sainsbury’s if it doesn’t merge with Asda. Sales momentum is poor and the business still seems to be having problems with empty shelves according to posts from its customers on social media.

“Its new feedback channel, cheerily titled ‘Lettuce Know’, will no doubt relay customers’ concerns to management but the key issue is how quickly changes can be made.

“Sainsbury’s needs Asda to help it get out of trouble and give it the strength to fight off the competition from discounters Aldi and Lidl. Failure to secure a deal will leave it clearly exposed as the weakest player in the sector with no plan B with which to fight back.”

Taylor Wimpey

“Either the market has got it wrong or there could be a nasty shock down the road for Taylor Wimpey shareholders.

“Management are adamant in today’s trading update they will maintain a dividend payment in 2019 which implies a double-digit dividend yield. In normal circumstances, a yield of 10% or more is usually a reliable indicator that the market doesn’t believe the payout is sustainable.

“In the background, it has to be said that trading doesn’t look bad with average selling prices flat and volumes a little higher.

“Yet the company’s flagging of ‘increasing customer caution’ in London and the South East at the end of last year does suggest prices could come under pressure in 2019. Certainly, the latest housing market figures suggest as much. At the same time, build costs are increasing.

“This could undermine the company’s efforts to deliver on the strategy announced in May 2018, which focused on squeezing more out of its assets to deliver better returns for investors.

“In theory the Goldilocks ‘just right’ conditions which have fuelled booming profits for the housebuilding sector remain in place; the jobs market is strong, mortgage rates are low and the Help to Buy scheme is in place until 2023.

“But the current uncertainty means Taylor Wimpey, and its peers, can take nothing for granted.”

These articles are for information purposes only and are not a personal recommendation or advice.