Sainsbury's Dividend Covered Twice By Underlying Earnings

Sainsburysdividend Covered Two Times By Underlying Earningsgreggspro

Sainsburys: Dividend covered two times by underlying earnings Greggs: Progressive dividend which is covered two times by diluted earnings per share before exceptional items McColl’s: Dividend based on a 50% pay-out ratio to profit after tax (before adjusting gains but after adjusting losses) Payout Policy Takeaways: Greggs is the only company that provides a future outlook for its dividends (progressive) Sainsbury’s determine their dividend on adjusted earnings Can be instable (Arnold, 2012) Subject to earnings management Can have a negative effect on the company (see Sainsburys) Every company paid an interim and final dividend over the last three years No other pay-out related transactions (e.g. share repurchases) Dividend Analysis Sainsbury’s profit after tax decreased constantly; dividend per share remained mostly constant/ slightly increased Attempt to keep the shareholders satisfied or rather pay them for their loyalty Greggs’ and McColl’s dividend per share are in line with the profit after tax Profit after tax (£m) FY16/17 Sainsbury Greggs McColls 377 62..92 FY17/18 Sainsbury Greggs McColls 309 64..19 FY18/19 Sainsbury Greggs McColls 219 71.63 6.85 Dividend per share (in GBp) FY16/17 Sainsbury Greggs McColls 10..

FY17/18 Sainsbury Greggs McColls 10...3 FY18/19 Sainsbury Greggs McColls 11 35. Dividend Analysis Greggs dividend payout ratio was constant over the three years McColl’s ratio was constant for the first two years, but decreased for FY18/19 Sainsbury’s: Dividend payout ratio has more than doubled to 121% in FY18/19 Partially used retained earnings to pay dividends Consequence of underlying earnings as basis May hamper future investments Dividend per share FY16/17 FY17/18 FY18/19 Average Sainsbury’s 10,,,,47 Greggs 31,,,,00 McColl’s 10,,30 4,00 8,17 EPS FY16/17 FY17/18 FY18/19 Average Sainsbury’s 17,,30 9,,30 Greggs 57,,,,87 McColl’s 12,,32 5,,36 Dividend Payout Ratio Sainsbury FY16/17 FY17/18 FY18/19 0...

Greggs FY16/17 FY17/18 FY18/19 0... McColls FY16/17 FY17/18 FY18/19 0... Dividend Yield Greggs dividend yield ratio was constant over the three years Provides the lowest ratio Provides the most constant dividend yield McColl’s dividend yield ratio declined for the periods under consideration McColl’s annual cash return is on a good (average) level with a negative tendency during the periods under consideration Sainsbury’s dividend yield ratio constantly increased Sainsbury provides the highest (average) cash return Dividend yield ratio FY16/17 FY17/18 FY18/19 Average Sainsbury’s 3,83% 4,20% 4,92% 4,32% Greggs 3,20% 2,33% 2,83% 2,79% McColl’s 5,75% 3,63% 3,17% 4,18% Dividend yield ratio Sainsbury’s FY16/17 FY17/18 FY18/19 3.E-2 4.E-2 4.E-2 Greggs FY16/17 FY17/18 FY18/19 3.E-2 2.E-2 2.E-2 McColl’s FY16/17 FY17/18 FY18/1 9 5.E-2 3.E-2 3.E-2 Recommendations INVESTOR RISK LEVEL RECOMMENDATION Risk Averse Risk Neutral Risk Seeking Greggs: Constant level of dividend Progressive dividend policy Highest dividend per share McColl’s: Mostly constant dividend with a dip in FY18/19 in line with EPS / Profit after tax Sainsbury’s: High level of dividend pay-out ratio Decreasing EPS / Profit after tax References Arnold, G. (2012) Corporate Financial Management. London: Pearson Bloomberg (2019) UK 100 Index. (Accessed: 08 November 2019). Greggs (2019) Annual Report 2018. Available at: (Accessed: 05 November 2019). J Sainsbury plc (2019) Annual Report 2019. Available at: (Accessed: 29 October 2019). McColl’s (2019) Annual Report and Accounts 2018. Available at: (Accessed: 01 November 2019). 140 BUSINESS & FINANCE ICONS 140 BUSINESS & FINANCE ICONS 140 BUSINESS & FINANCE ICONS

Paper For Above instruction

The analysis of dividend policies among retail companies such as Sainsbury’s, Greggs, and McColl’s provides insights into their financial health, investor appeal, and strategic priorities. Understanding these dividend strategies involves examining their payout ratios, earnings coverage, and future outlooks, all of which influence investor risk levels and expectations. This paper critically evaluates the dividend policies of these firms, considering their profitability, dividend sustainability, and implications for shareholders, especially in the context of stability and growth prospects.

Sainsbury’s adopts a conservative dividend approach, with dividends covered more than twice by underlying earnings, reflecting a cautious yet stable payout policy. The firm’s dividend payout has experienced fluctuations linked primarily to its declining profit after tax, which decreased consecutively over three fiscal years—£377 million in FY16/17, dropping to £219 million in FY18/19 (J Sainsbury plc, 2019). Despite this decline, Sainsbury’s maintained a relatively constant dividend per share, roughly 10 to 11 pence, attempting to reward loyal shareholders and sustain investor confidence despite profitability challenges. The payout ratio for Sainsbury’s was notably high, reaching over 121% in FY18/19, indicating that the company partly utilized retained earnings to maintain dividend payments, which could restrict future investment flexibility and marginally increase financial risk (Arnold, 2012).

In comparison, Greggs emphasizes a progressive dividend policy, with dividend coverage consistently around two times by earnings before exceptional items. The company's total dividend per share has increased steadily, supported by stable or increasing earnings, evidencing its commitment to shareholder returns and growth. Greggs’ earnings per share (EPS) showed an upward trend, with an average growth rate that justified its consistent dividend policy (Greggs, 2019). Unlike Sainsbury’s, Greggs maintains a lower payout ratio but offers the highest dividend per share among the three, indicating confidence in sustainable earnings growth and a focus on long-term shareholder value. Additionally, Greggs’ dividend yield remained stable across the years (about 2.80%), making it attractive for investors seeking a reliable income stream with minimal volatility (Bloomberg, 2019).

McColl’s presents a mixed approach, with a dividend policy based on a 50% payout ratio to profit after tax, excluding gains and losses. During FY16/17 and FY17/18, its dividend payout ratio was stable, aligning with profits, but in FY18/19, it decreased, reflecting a tightening of dividend policies amid profit fluctuations. The company’s EPS and dividends are positively correlated; however, the dividend per share experienced a decline in FY18/19, paralleling the dip in profit after tax (£6.85 million from £62.92 million in FY16/17). McColl’s dividend yield fluctuated but remained around 3-4%, indicating moderate return levels, though declining trends may impact investor appeal and suggest a cautious outlook (McColl’s, 2019). This approach appears aimed at balancing dividend sustainability with financial flexibility, especially in a highly competitive retail environment.

The dividend coverage ratios, payout ratios, and yields highlight differing strategic priorities. Sainsbury’s demonstrates stability with a focus on maintaining consistent dividends, even at the expense of payout ratio sustainability. Greggs prioritizes growth and shareholder value with a progressive dividend policy and stable yield. McColl’s takes a more cautious approach, adjusting dividend payouts to profits with an emphasis on financial flexibility. From an investor’s perspective, risk aversion and long-term stability favor Greggs and Sainsbury’s due to their respective policies of dividend growth and payout stability, respectively. On the other hand, risk-seeking investors may favor Greggs’ growth potential and continuous dividend increases, while risk-neutral investors could view McColl’s balanced, profit-aligned approach as attractive.

The implications of these dividend policies extend to potential future investments. Sainsbury’s high payout ratio and declining profits could constrain capital for expansion or innovation, potentially hampering long-term growth. Conversely, Greggs’ consistent dividends and earnings support strategic investments, fostering sustainable growth. McColl’s flexible dividend policy mitigates risk during profit fluctuations but might limit dividend growth prospects. Overall, each company's dividend strategy reflects its operational realities and strategic goals, with stability and growth being central themes. Investors should consider their risk appetite, income requirements, and growth expectations when evaluating these companies.

References

• Arnold, G. (2012). Corporate Financial Management. London: Pearson.
• Bloomberg. (2019). UK 100 Index. Retrieved November 8, 2019, from https://www.bloomberg.com.
• Greggs. (2019). Annual Report 2018. Retrieved November 5, 2019, from https://www.greggs.co.uk.
• J Sainsbury plc. (2019). Annual Report 2019. Retrieved October 29, 2019, from https://www.about.sainsburys.co.uk.
• McColl’s. (2019). Annual Report and Accounts 2018. Retrieved November 1, 2019, from https://www.mccolls.co.uk.
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