Financial Strategy

Analysis of
Sainsbury plc.s Financial Strategy

Written by

Jason Cates
0

 Jason Cates, 2012

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To be delivered to the University of Hertfordshire on or by

18 December 2012

Ordered by Jason Cates to be printed

14 December 2012

Printed in the United Kingdom

1

Evaluate Sainsburys choice of sources of funds using appropriate theory

Evaluate Sainsburys dividend policy by using appropriate theory
Recommend an appropriate financial strategy for Sainsbury to be followed over the next 3
years.

Follow a report format.

Use Sainsburys financial data for the last 3-5 years in order to evaluate Sainsburys financial
strategy.
Use corporate life cycle theory to evaluate Sainsburys financial strategy.
Use other relevant corporate finance theory (e.g. M&M, Lintner, etc) to evaluate Sainsburys
financial strategy.
Take into consideration the current economic climate when recommending an appropriate financial
strategy for Sainsbury. Also, your recommendations should be based on the findings of your analysis
of Sainsburys financial strategy.
Use appropriate referencing
Use appropriate sources (for example, Sainsbury annual report, Refereed journals, Books). Do NOT
use sources such as Wikipedia, investopedia, etc.

Table of Contents
Introduction ............................................................................................................................................ 4
Aim ...................................................................................................................................................... 4
Setting the Scene ............................................................................................................................ 4
Part I ........................................................................................................................................................ 5
Sources of Finance .............................................................................................................................. 5
Long-Term vs. Short-Term Debt (Positive)...................................................................................... 5
Trade Payables (Stable) ................................................................................................................... 6
Debt vs. Equity (Stable) ................................................................................................................... 7
Implications ......................................................................................................................................... 8
Gearing (Stable) .............................................................................................................................. 8
ROCE (Stable) .................................................................................................................................. 8
Cash and Cash Equivalents (Negative) ............................................................................................ 9
Boston Matrix (Positive)................................................................................................................ 10
Part II ..................................................................................................................................................... 11
Dividend Policy .................................................................................................................................. 11
Cost of Capital (Stable).................................................................................................................. 11
Shareholder Return ....................................................................................................................... 12
Recommendations ............................................................................................................................ 15
Debt Finance ................................................................................................................................. 15
Equity Finance ............................................................................................................................... 15
Cash Reserves ............................................................................................................................... 15
Part III .................................................................................................................................................... 16
Signatories......................................................................................................................................... 16
References ........................................................................................................................................ 17

Introduction
Aim
This report is carried out with the aim of analysing and evaluating Sainsburys financial strategy and
makes appropriate recommendations regarding its future strategy over the next 3-5 years. This will
be carried out by evaluating Sainsburys current sources of finance and analysing their financial
implications. This will be carried out in the context of Sainsburys past financial strategy as well as its
long-term dividend policy.
Setting the Scene
In March 2012, Sainsburys total liabilities increased by 736m (12.32%). This is while equity,
including retained earnings and reserves, increased by 205m (3.78%). This included an 11.89%
increase (278m) in long-term borrowings and a 5.51% (143m) increase in trade payables. This
increase in trade payables was in-line with Sainsburys growth in revenue which stood at 5.65%
(1.192bn). In total, long-term debt in 2012 made up 53.27% of Sainsburys total liabilities, up from
50.76% in 2011. (Sainsbury, 2012)
As stated above, Sainsburys use of debt grew faster than its use of equity. This increased
gearing from 33.4% in 2011 to 35.2% in 2012. This increase in debt for 2012 was fuelled by Sainsbury
increasing investment in property, plant and equipment and other revenue generating assets. This
is while Sainsburys net debt fell by 11.2% (168m). This shows that increasing levels of Sainsburys
debt has been used to fund investment in cash and other interest bearing assets. In this context,
net debt made up 21.1% of capital employed, down from 23.6% the previous year. (Sainsbury, 2012)

Part I
Sources of Finance
Long-Term vs. Short-Term Debt (Positive)
Long-term debt has played an increasing part of Sainsburys financial strategy. In 2008, longterm debt made up 48.4% of Sainsburys total debt. However, by 2012 this proportion had increase
to 53.27%. This increase in long-term borrowings has helped fund investment in PPE and other
revenue generating assets. (Sainsbury, 2012)

Long-Term vs. Short Term Debt

60.00%
55.00%

53.27%

51.20%

51.60%

52.57%

50.76%

48.80%

48.40%

47.43%

49.24%

46.73%

2008

2009

2010

2011

2012

50.00%
45.00%
40.00%
Non-Current Liabilities

Current Liabilities

(Sainsbury, 2012)
This long-term financial strategy will provide Sainsbury with more time and flexibility to
repay this debt, thus reducing its financial risk. This long-term financial policy will promote long-term
stability and help minimise the long-term costs of capital.
This increasing use of long-term debt has helped facilitate Sainsburys growth in both instore and online sales. (IR, 2012) This growth in multi-channel sales helps to diversify Sainsburys
revenue streams and helps to ensure long-term sustainability by reducing overall business risk. This
includes investing in growing markets such as China whilst locking in lower interest rates over the
long-term. (Sainsbury, 2012)

Trade Payables (Stable)

Growth in Revenue and Trade
Payables

Trade Payables as a Proportion of

Revenue

10.00%

13.50%

5.00%

13.00%
12.50%

0.00%
2009

2010

2011

2012

12.00%

-5.00%

11.50%
Revenue

2008

Trade Payables

2009

2010

2011

2012

(Sainsbury, 2012)
Over the last two years, growth in trade payables has remained in-line with revenue.
However, in 2010, Sainsbury repaid some of its trade payables after growth exceeded that of
revenue in 2009. Since then, trade payables have remained at roughly 12.3% of revenue. This is
lower than Sainsburys closest competitor Tesco with trade payables of 19% of revenue, but higher
than that of Morrisons with 11.5%. (FT, 2012c)
In 2012, Sainsburys trade payables equated to 47.4 payable days, declining from 50.8 days
in 2009. (Sainsbury, 2012)This reduction will provide Sainsbury with greater financial flexibility as
market growth staggers and trading conditions remain tough. This policy, if maintained, with help
promote long-term flexibility and growth. However, Sainsbury must ensure it can maintain this debt
over the long-term as not to increase its financial risk.

Debt vs. Equity (Stable)

This report will now analyse Sainsburys use of debt in proportion to equity as a source of
finance. This report will also consider Sainsburys net debt which includes deductions such as cash
and other interest bearing assets.

Debt vs. Equity

Net Debt vs. Equity

1.5

0.4
0.3

0.2
0.5

0.1

0
2008

2009

2010

2011

2012

2008

2009

2010

2011

2012

(Sainsbury, 2012)
Sainsburys debt has remained relatively stable over the last five years increasing
proportionately with equity. As such, gross debt has remained at roughly 1.16 times equity.
Furthermore, Sainsburys net debt, which deducts cash and other interest bearing financial assets,
has also remained stable at roughly 0.29 times equity. As par the annual report, Sainsburys increase
in gross debt during the financial year 2012 was due to increasing investment in estate
development. (Sainsbury, 2012)

Implications
Gearing (Stable)

Gearing
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2008

2009

2010

2011

2012

(Sainsbury, 2012)
In 2012, Sainsburys gearing stood at 35.2%, up from 33.4% a year before. However, overall
this gearing has remained relatively stable over the last 5 years ranging from 30% in 2008 to 38%
2009 and then falling back again in 2010. Therefore, this paper considers Sainsburys gearing to be
stable with no corrective action being required at the present time. More recent increases in gearing
can be associated with the financing of new revenue generating assets such as new stores and other
relevant PPE. As such, once these assets reach their full operational capacity, gearing will naturally
full back towards 30% as time progresses. (Sainsbury, 2012)
ROCE (Stable)
Pre-Tax Return on Capital Employed
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
2008

2009

2010

2011

2012

(Sainsbury, 2012)
Between 2008 and 2010, Sainsburys return on capital employed increased steadily until
levelling out at 11% in 2010 and rising to 11.1% the following year. This stability is attractive to long8

term investors who look to base their returns on high dividend yields rather than through increasing
capital value. In addition, ROCE has remained stable whilst liabilities and equity have increased. This
shows that this additional finance has been appropriately invested in revenue generating assets as
to maintain this stable return. (Sainsbury, 2012)
Cash and Cash Equivalents (Negative)

Cash and Cash Equivalents

Cash and Cash Equivalents

1000

15.00%

800

10.00%

600

5.00%

400
0.00%

200

2008

2009

2010

2011

2012

0
2008

2009

2010

2011

Cash/Assets

2012

Cash/Liabilities

(Sainsbury, 2012)
Sainsburys cash level has remained relatively stable over the last 5 years ranging from
837m in 2010 to 501m in 2011. Cash more recently stood at 739m in the financial year 2012.
(Sainsbury, 2012) Furthermore, between 2008 and 2010, cash remained at an average rate of 13% of
liabilities. (Sainsbury, 2010) However, in 2011, this proportion fell to 8.4%; such falls would be
unsustainable in the long-term and could potentially increase Sainsburys business risk. (Sainsbury,
2011) This is due to cash acting as a safety barrier if and when trading activity declines. Therefore,
Sainsbury must ensure it retains adequate cash reserves to mitigate this business risk associated
with corporate growth, especially when expanding into the area of banking. Furthermore, cash is
required to fund investment in new ventures and helps provide companies with new long-term
growth opportunities. (Watson & Head, 2010)

Boston Matrix (Positive)

(Sainsbury, 2012)
As shown in the matrix above, growth in Sainsburys in-store sales are likely to remain
stagnant for the foreseeable future. Thus, Sainsbury is now required to look elsewhere in regards to
future growth prospects. Therefore, this in-store retail is now used as a cash cow to fund new
ventures such as online retail which could be considered a Star. (IR, 2012) More recently,
Sainsbury expanded into banking which could be considered a Question Mark, but verging on
becoming a star. (Sainsbury, 2012) This broad mix of cash generating business alongside new high
growth ventures will help to ensure Sainsburys long-term sustainability and growth. This increased
diversity will also help reduce Sainsburys overall business risk. (Watson & Head, 2010)

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Part II
Dividend Policy
Cost of Capital (Stable)

Cost of Capital
20.00%
15.00%
10.00%
5.00%
0.00%
2008
Cost of Debt

2009

2010

2011

Cost of Equity

2012
WACC

(Sainsbury, 2012)
In recent years, Sainsburys long-term cost of equity has increased in-line with gearing. In
addition, Sainsburys cost of debt increased to 5.2% in 2012, up from 4.64% a year before. Overall,
Sainsburys cost of capital stood at 10.8%, up from 10.4% in 2011, but has remained relatively flat
since 2009. This stability is due to the increasing costs of maintaining equity being offset by the
lower cost of debt. (Sainsbury, 2012)
These costs are likely to remain stable for the foreseeable future as long as gearing remains
stable. However, if gearing does start to increase, this will increase the companys financial and
bankruptcy risk and thus increase its cost of equity. However, if this debt is largely made up of longterm debt, this will lock in the current interest rate for a greater length of time. This will allow
Sainsbury more time to take corrective action as required. (Watson & Head, 2010)
In-line with Miller and Modiglianis first theorem, changes in Sainsburys cost of equity has
remained in-line with gearing. However, decreases in gearing have resulted in the cost of equity
remaining flat rather than fall. Additionally, Sainsburys cost of debt has also fluctuated, lagging a
year behind gearing. This suggests that gearing also has an effect on a companys cost of debt.

11

However, in 2012, Sainsburys use of debt did produce a tax shield worth 23.04, thus helping to
mitigate any rise in overall costs of capital. (HMRC, 2012)(Sainsbury, 2012)

Interest Cover
10.00
8.00
6.00
4.00
2.00
0.00
2008

2009

2010

2011

2012

(Sainsbury, 2012)
Sainsburys interest cover increased significantly in 2010 reaching 8.7 times, up from 5.6
times a year before. However, since then it has gradually declined having fallen to 7.5 times by 2012.
(Sainsbury, 2012)This suggests that Sainsburys current business model gradually reduces the
companys effective interest cover with corrective action thus being required every few years. This
may be of concern during the years in which corrective action is required due to potential
investments being forsaken to carry out such corrective action.
Shareholder Return

Cost of Capital (Dividend Yield)

Dividend Yield

8.00%

6.00%

6.00%
4.00%

4.00%

2.00%
2.00%

0.00%
2008

2009

Cost of Debt

2010

2011

Dividend Yield

2012

0.00%

WACC

2008

(Sainsbury, 2012)

2009

2010

2011

2012

(HL 2012)

As shown in the graphs above, Sainsburys dividend yield (Short-term cost of equity)
remained at 4.3% between the years 2009 to 2011 and then rose to 5.3% in 2012. (JL, 2012) This is
12

higher than its main competitive rivals Tesco (4.38%) and Morrison (4.1%). In addition, since March
2009, Sainsburys share price has fallen by 1.17%, significantly less than Tesco at 13.84% and
Morrison with 3.52%. (FT, 2012a) (FT, 2012b) This description of Sainsbury is similar to that of a
mature company with shareholder returns being in the form of dividends with the value of capital
invested remaining stable.
Relating this to Sainsburys cost of equity, the dividend yield reflects the changes in
Sainsburys share price as well the rate of dividend. Simply, the dividend yield illustrates the cost of
issuing new equity whilst the overall cost of equity illustrates the cost of maintaining equity.

(FT, 2012c)
This type of dividend policy appeals more to long-term investors such as pension funds. This
is due to their desire for high dividend paying investments with little need to cash out. Therefore,
minor changes in share prices may not be an overwhelming factor in their decision-making process.
However, short-term investors will be turned off by such a policy due to their desire for higher
capital growth over dividend pay-outs. Therefore, Sainsbury must consider which type of
shareholder it wishes to attract which will raise them the most finance at the lowest cost, as well as
the signalling effects this may have. (Watson & Head, 2010)
Relating this to Lintners theorem, changes in Sainsburys rate of dividend directly reflects its
earnings per share in the sense that it has have remained broadly flat. In addition, any increase in
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dividend is only implemented once increased earnings are secure and are proven to be sustainable.
This is to ensure such changes in dividend do not then have to be reversed at a later date which may
give the wrong impression in relation to the signalling effect. Thus, Sainsburys dividend policy is inline with Lintners theorem and is appropriate for its stage in the corporate life cycle. (Johnson,
Scholes, & Whittington, 2008)

Dividend Cover
2.00
1.50
1.00
0.50
0.00
2008

2009

2010

2011

2012

(Sainsbury, 2012)
In relation to Sainsburys ability to maintain this dividend, we must consider the dividend
cover. As shown in the graph above, between 2008 and 2011, Sainsburys Earnings per share
increased to a greater extent than its dividend payments, thus increasing its overall dividend cover.
However, the dividend cover remained flat in 2012 due to Sainsburys higher rate of dividend. This
general trend shows that Sainsbury will be in a position to maintain this dividend for the foreseeable
future with no corrective action being required. (Sainsbury, 2012)

14

Recommendations
Overall, Sainsburys financial outlook remains stable. However, we do recommend minor
alterations to take place over the next 3 years which will help promote long-term sustainability and
help mitigate Sainsburys long-term financial risk. These recommendations are based on the
assumption of economic actively remaining flat for the foreseeable future. Any improvement or
decline in such activity will therefore require a change in short to medium term financial strategy.
Debt Finance
Due to the recent falls in Sainsburys cost of debt, we recommend locking in this rate by
replacing short-term debt with longer term debt. This will reduce the volatility in Sainsburys cost of
debt and help encourage long-term sustainability. This will reduce Sainsburys financial risk and
allow more time to take corrective action if and when these costs start to increase.
Equity Finance
In addition, any increase in the use of equity as a source of finance should be issued in such
a way that doesnt significantly impede the companys long-term dividend cover. This means any
increase in in the use of equity should be lower than or equal to Sainsburys growth in net profits.
This will help ensure Sainsburys rate of dividend and overall costs of equity remain sustainable in
the long-term. Simply, Sainsburys current dividend policy should remain in place with any change
being proportionate to long-term sustainable profits.
Cash Reserves
In order to mitigate long-term business risk, Sainsbury should retain cash at a level
proportionate to its liabilities. This is especially the case if Sainsbury is to consider expanding into the
retail banking industry. Therefore, this paper recommends Sainsbury maintain cash levels equal to or
greater than 10% of Sainsburys total liabilities. This cash will act as a safety barrier against any
increases in overall business risk.

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Part III
Signatories
I commend this paper to the University of Hertfordshire to be delivered on or by 18 December 2012.

Jason Cates

___________

Mail: AdrJasonCates@GoogleMail.com
Portfolio: SlideShare.net/AdrJasonCates
LinkedIn: LinkedIn.com/in/AdrJasonCates

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References
Financial Times (2012a) Tesco PLC. Available at:
http://markets.ft.com/Research/Markets/Tearsheets/Summary?s=TSCO:LSE [Accessed: 7th
December, 2012]
Financial Times (2012b) WM Morrison Supermarkets PLC. Available at:
http://markets.ft.com/research/markets/Tearsheets/Summary?s=MRW:LSE [Accessed: 7th
December, 2012]
Financial Times (2012c) J Sainsbury PLC. Available at:
http://markets.ft.com/research/Markets/Tearsheets/Summary?s=SBRY:LSE [Accessed: 7th
December, 2012]
Hargreaves Lansdown (2012) Sainsbury (J) plc Company Overview and Comment. Available at:
http://www.hl.co.uk/shares/shares-search-results/s/sainsbury-j-plc-ordinary28,47p/research&ei=I7u_UIj1LtC10QWClID4DA&usg=AFQjCNFU4grqJmWscd7RFqf8h_b8jQmwQA
[Accessed: 14th December 2012]
HMRC (2012) Corporation Tax Rates. Available at: http://www.hmrc.gov.uk/rates/corp.htm
[Accessed: 7th December 2012]
Internet Retailing (2012) Sainsburys claims number two spot in online grocery market. Available at:
http://internetretailing.net/2012/03/sainsburys-claims-number-two-spot-in-online-grocery-market/
[Accessed: 7th December 2012]
Johnson, G., Scholes, K. & Whittington, R. (2008) Exploring Corporate Strategy. 8th edn.
Harlow:Pearson
Sainsbury (2009) Annual report 2009. [Online] Available at: http://www.jsainsbury.co.uk/media/171784/ar2009_report.pdf [Accessed: 23rd November 2012]
Sainsbury (2010) Annual report 2010. [Online] Available at: http://www.jsainsbury.co.uk/media/171797/ar2010_report.pd [Accessed: 23rd November 2012]
Sainsbury (2011) Annual report 2011. [Online] Available at: http://www.jsainsbury.co.uk/media/171813/ar2011_report.pdf [Accessed: 23rd November 2012]
Sainsbury (2012) Annual report 2012. [Online] Available at: http://www.jsainsbury.co.uk/media/649393/j_sainsbury_ara_2012.pdf [Accessed: 23rd November 2012]
Watson, D. & Head, A. (2010) Corporate Finance: Principles and Practice. 5th edn. Harlow:Pearson

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