Financial analysis and corporate governance: J Sainsbury plc.

Q1. Company analysis of Sainsbury in focusing on shareholder value

Introduction

The main preoccupation of any shareholder is to determine the financial strength of the company that they are investing in (Ballow, Burgaman and Molnar, 2004). They are therefore on a constant lookout for the organisation’s activities and financial performance to enable investors to make certain investment decisions.  Some of the basic indicators for financial strength of the organisation are profitability trends and crucial ratios related to shareholder value as shown in the table below:

Financial indicators	2011	2012	2013
Sales	21,102m	22,294m	23,303m
Total assets	11,399m	12,340m	12,695m
Total liabilities	3,033m	3,575m	3,846m
PBIT	827m	799m	788m
Net profits	640m	598m	614m
Debt ratio	26.61%	28.97%	30.29%
EPS	34.4p	32p	32.7p
ROCE	11.10%	10.60%	10.40%
ROE	11.80%	10.62%	10.71%
Dividend per share	15.1p	16.1p	16.7p
Dividend pay-out ratio	0.44	0.5	0.51

Adopted from: J Sainsbury, 2012; J Sainsbury, 2013; J Sainsbury, 2014

Financial analysis

The sales volumes of the company have grown constantly since 2011 as shown in the table above. The trend has however been opposite in the profits before tax with the trend indicating a steady decline over the three years. This alludes to the fact the organisation’s operational efficiency may have declined in the past. Despite this decline, the company has maintained an almost constant annual dividend with the dividend per share being increased slightly over the years as shown in the table above.

While the dividends paid may not be constant, there is evidence that there is a commitment to ensure that dividends paid are constant. This approach to financial strategy is useful for accommodating the expectations of investors who may be in need of regular incomes (Corina, Mirela and Mihaela, 2009). It also serves a psychological purpose where investors are assured that all is well within the organisation by virtue of their willingness to keep paying dividends. It signifies the belief of the management that the fundamental strengths of the organisation are unaffected despite upheavals in profitability (Firer and Viviers, 2011). It also works as a statement of confidence on the future prospects of the organisation. The dividend pay-out ratio compares the dividends paid to the net income (Rich, Jones and Heitger, 2011). Sainsbury’s commitment to rewarding investors is apparent from the fact that the ratio has been increasing since 2011 despite the disparities in the growth or profitability of the company.

The debt ratio is an important indicator to investors on the level of risk that the investments are exposed to (Mladjenovic, 2013). Debt ratio is derived by dividing the total liabilities to the total assets and it displays the level of financial leverage in terms of using debt capital to finance organisational operations and investment activities (Graham and Smart, 2011). Where the debt ratio is high, the risk shouldered by investor equity is low and vise-varsa. At Sainsbury, the debt ratio has been increasing marginally from 26.61% in 2011 to 28.97% in 2012 and 30.29% in 2013. This means that the risk borne by the investor has been reducing marginally.

The returns on equity and returns on capital employed seem to differ insignificantly. An organisation that efficiently utilises the funds invested has a higher ratio for returns on equity ROE (Nwakanma and Ajibola, 2013). For the 3 years, ROE was at 11.80%, 10.62%, and 10.71% respectively. This is almost constant at about 10.7% signifying a stable approach to investment and management. While higher returns on investment may be desirable, having ratios that are constant can be useful in indicating to investors that future performance is likely to be predictable (Nwakanma and Ajibola, 2013). The returns on capital employed ROCE gives returns on the net assets. It’s an important measure in determining the level of prudence in purchasing and utilising the assets owned by the company (Lumby and Jones, 2003). The constant decline in ROCE for the 3 years under review could be an indicator that utilisation of resources has been on a constant decline or that there is need to acquire assets that conform to the emerging market demands.

Strategic overview

In addition to financial indicators, investors evaluate strategies embraced by the organisation to predict the future performance of the organisation. This is important as investors need to get a picture of where the organisation is heading and whether it would be prudent to keep investing in it. In general, the overall strategy for Sainsbury can be said to be positioning for growth as is evident in their commitment to pursue generic growth while working towards introducing and growing complementary services and products (J Sainsbury, 2012; J Sainsbury, 2013; J Sainsbury, 2014). Complementary services would be those that are outside what is considered as the main focus of the organisation. In this case, Sainsbury’s main focus would be running supermarkets where the main product range is foods, clothing and household products. The complementary services/products would be the financial services as provided by the bank and the opening of pharmacies.

One of the main investment decisions made in 2013 was the acquisition of 50% stake in the Sainsbury bank. The bank was hitherto co-owned between J Sainsbury and Lloyds Banking Group with each having a 50% stake (J Sainsbury, 2014). The agreement reached to acquire Lloyd’s share is expected to have the bank fully owned by the company. This is at a cost of £248 million. This is part of the business’s long term strategy to enhance growth in complementary channels and services. This is a fruit of the commitment to accelerate growth in the complementary services and non-food product ranges that have seen the company target greater involvement in financial services and pharmacies (J Sainsbury, 2012; J Sainsbury, 2014).  

Further initiatives for growing new business have included pharmacies and online stores. Also investment was done in growing property value through opening of 14 supermarkets, 87 convenience stores and 8 extensions to the company’s estate (J Sainsbury, 2014). Investment in growth has been a common feature across the years with the 2011 statement registering a 15.9% growth in the supermarket portfolio since 2009 (J Sainsbury, 2012). This has been coupled with investment in emerging trends such as the use of technology to enhance the shopping experience of customers as well as the strengthening of the online stores.

Conclusion

Having considered the analysis above, Sainsbury can be said to be predictable and stable. It is well positioned for future growth and it’s a good organisation to invest in, especially for investors with a preference for reasonably constant dividend pay-outs.

Q2. Corporate governance and performance of organisations

Introduction

There is a strong connection between corporate governance and the financial health of the firm. Corporate governance is a function that is designed and enforced by the top leadership of the organisation which includes the board of directors and the senior managers. In a nutshell, corporate governance guides strategic positioning of the organisation, creates and enforces organisational values, engages in risk management, and exercises general oversight of the organisation (Hardi and Buti, 2012).  

Contribution of corporate governance

Creation of a strategic direction and values of the organisation is an important aspect of corporate governance. Organisational values are created and enforced through corporate governance and it serves the purpose of ensuring that vision is shared and that all members of the organisation work towards achieving the same (Lin-Hi and Blumberg, 2011). Sainsbury attributes its success to its strong organisational culture which is founded on its core values as have been developed over time. The organisational vision is the main guiding principle for creating these values. Sainsbury’s vision of in part reads ‘where people love to work’ and this informs their collaborative approach with employees (J Sainsbury, 2014). For instance, in 2013, the employees received a 90million bonus as a reward for their hard work. This motivates and turns the 157,000 employees of the company as important partners in creating organisational success.

Corporate governance creates clear structures to facilitate cost effective and efficient operations and these start from the board of directors itself (Lin-Hi and Blumberg, 2011). The roles are also clearly outlined as is the case with the Sainsbury board where roles such as risk management, strategic leadership and oversight over operations are outlined (J Sainsbury, 2014). This clarity facilitates smooth operations and promotes profitability.

Risk management is an important aspect of corporate governance and it ensures that potential risks are identified and mitigation done to avoid the risk occurring (Hardi and Buti, 2012). At Sainsbury, this is done through internal audits as well as review of safety reports from across the organisation where areas of potential risk are identified and corrective action taken (J Sainsbury, 2014). Also important is the management of stakeholder interests. The board Sainsbury spearheads a strong sustainability agenda through responsible sourcing and maintenance of ethics (J Sainsbury, 2014). This is in addition to implementing measures such as bonuses that keep the employees happy and motivated. These help in boosting performance.

Poor corporate governance structures can easily lead to corporate failures as was demonstrated by Lakshan and Wijekoon (2012) where they found a strong relationship between corporate failure and lack of adequate corporate governance structures and practices.

Conclusion

Corporate governance plays an important role in the success of the organisation through influence on strategic positioning, organisational values, operational approaches, risk management, and stakeholder relations. As is evident in Sainsbury, it is the existence of strong corporate governance structures and practices that helps in creating and sustaining the success of the organisation.

References

Ballow, J.J., Burgman, R., Molnar, M.J., 2004. Managing for shareholder value: intangibles, future value and investment decisions, Journal of Business Strategy 25(3), pp. 26-34

Corina, I., Mirela, N., Mihaela, G., 2009. Factors That Affect Dividend Policies, Romanian Economic and Business Review 4(2), pp. 83-88

Firer, C., Viviers, S., 2011. Dividend policies of JSE-listed companies: 1989-2010, Management Dynamics 20(4), pp. 2-22

Graham, J., Smart, S., 2011. Introduction to Corporate Finance: What Companies Do,  Cengage Learning

Hardi, P., Buti, K., 2012. Corporate governance variables: lessons from a holistic approach to Central-Eastern European practice, Corporate Governance 12(1), pp. 101-117

J Sainsbury plc, 2012. Annual Report and Financial Statements 2011, (Online) Available at: http://www.j-sainsbury.co.uk/media/171813/ar2011_report.pdf (Accessed 9 March 2014)

J Sainsbury plc, 2013. Annual Report and Financial Statements 2012, (Online) Available at: http://www.j-sainsbury.co.uk/media/649393/j_sainsbury_ara_2012.pdf (Accessed 9 March 2014)

J Sainsbury plc, 2014. Annual Report and Financial Statements 2013, (Online) Available at: http://www.j-sainsbury.co.uk/media/1616189/sainsburys_ara.pdf (Accessed 9 March 2014)

Lakshan, A.M.I., Wijekoon, W.M.H.N., 2012. Predicting Corporate Failure of Listed Companies in Sri Lanka, GSTF Business Review (GBR) 2(1), pp. 180-185

Lin-Hi, N., Blumberg, I., 2011. The relationship between corporate governance, global governance, and sustainable profits: lessons learned from BP, Corporate Governance 11(5), pp. 571-584

Lumby, S., Jones, C., 2003. Corporate Finance: Theory & Practice, Cengage Learning EMEA

Nwakanma, P.C., Ajibola, A., 2013. Inflation Dynamics and Returns on Equity: The Nigerian Experience, International Journal of Economics and Finance 5(2), pp. 164-169

Rich, J., et al., 2011. Cornerstones of Financial and Managerial Accounting, Cengage Learning

Appendix 1: Formulas and calculations

Debt Ratio= Total liabilities/Total debts

Debt ratio for 2013 = 3,846/12,695

Debt ratio for 2011 = 3033/11399

Return on equity = Net Income/Shareholder's equity

ROE for 2013 = 614/5733

ROE for 2012 = 598/5629

ROE for 2011 = 640/5424

Dividend pay-out ratio = Annual dividend per share/ Earnings per share

Dividend pay-out ratio for 2013 = 16.7/32.7

Dividend pay-out ratio for 2012 = 16.1/32

Dividend pay-out ratio for 2011 = 15.1/34.4