Here’s why the Sainsbury’s share price could keep rising

Man shopping in supermarket

Takeovers in the defence and grocery markets have dominated the business news in recent weeks. Indeed, the Sainsbury’s (LSE: SBRY) share price leapt around 15% in just a day on Monday.This was on the back of expectations that private equity could bid for the company – likely at a premium to its current share price.

The fight for Morrisons between Fortress and Clayton, Dubilier & Rice (the latter being advised by Sir Terry Leahy former boss of Tesco), shows that there’s demand for supermarkets. The takeover competition has been pushing up the price of Morrisons. That could bode well for any future takeover of Sainsbury’s.  

But there’s always the possibility that Sainsbury’s might not become the subject of a takeover. Or there may be less of a bid battle because Sainsbury’s has less freehold property than Morrisons, making it slightly less attractive to suitors who want to sell and lease back stores to unlock value and earn a quick return. That could send the share price tumbling.

So will the Sainsbury’s share price keep rising?

However, I think the share price will continue to rise because I suspect a bid is more likely than not. UK shares are undervalued, private equity has a lot of cash it would like to earn a return on, and supermarkets are cash generative businesses, well suited to private equity ownership. Therefore, a bid at a premium is distinctly possible and that should see Sainsbury’s share price continue to do well.

Aside from Morrisons, analysts consider Sainsbury’s to be the most obvious target for a buyer – especially from the private equity world.

Even before the current bidding began, the share price was having a good run, especially since April when the Czech billionaire Daniel Křetínský raised his stake in the company to almost 10%. Qatar’s sovereign wealth fund is the supermarket’s largest shareholder, with almost 15% of voting rights. As such a bidder that can get these two investors on-side will have taken over a quarter of Sainsbury’s.

But if I bought some shares today, it needn’t be all about a punt on whether a takeover happens or not. The fundamentals of the supermarket are sound as well, potentially making it a good investment. The dividend will soon be back to where it was in 2019, pre-pandemic. The recent share price rise has pushed down the dividend yield, but it’s still a very respectable 3.3%. Sainsbury’s has £1.5bn of cash. And latest results showed that over the first 16 weeks of the year, like-for-like sales rose 8.4%.

Sainsbury’s has been making good progress in recent years. A bid for it seems likely and so I believe the Sainsbury’s share price could keep rising in anticipation of this, even after its recent jump.

All that said, I’m not in a rush to buy the shares. For me the big question is: will the shares rise enough to warrant investing? I’m not sure. Either way, we’ll likely find out in the coming weeks.

The post Here’s why the Sainsbury’s share price could keep rising appeared first on The Motley Fool UK.

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Andy Ross owns no share mentioned. The Motley Fool UK has recommended Morrisons. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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