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As a possible earnings inventory, J Sainsbury (LSE: SBRY) has dropped onto my radar once more.
For a very long time, I’ve insisted on a dividend yielding no less than 5% from firms working within the grocery store sector. That sort of return makes the danger of holding the shares worthwhile.
Nevertheless, J Sainsbury shot up on the finish of 2023, inflicting the yield to drop decrease. So it was off limits for me till weak point within the share worth this yr.
Now, with the share worth close to 256p, the forward-looking dividend yield for the buying and selling yr to February 2025 is above 5% once more.
Money movement is king
However grocery store companies are low margin, excessive turnover operations. Issues can shift simply when juggling the large numbers of income and prices, and that may result in decrease earnings.
We noticed Tesco get into bother a number of years again and an identical situation may occur with Sainsbury’s sooner or later. In any case, the sector is fiercely aggressive, and the rise of discounting operators like Aldi and Lidl appears unstoppable.
Nevertheless, one benefit J Sainsbury does have is steady money movement. That’s an important ingredient for any enterprise backing a dividend-paying inventory. It takes money to pay dividends and the grocery store sector is understood for its defensive traits. In different phrases, grocery store companies are much less cyclical than many others.
Right here’s the money movement and dividend report with the per-share figures proven in pence:
| Yr to February | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024(e) | 2025(e) |
| Working money movement per share | 56.2 | 42.3 | 55.5 | 106 | 42.9 | 92.9 | ? | ? |
| Dividend per share | 10.2 | 11 | 3.3 | 10.6 | 13.1 | 13.1 | 13 | 13.8 |
I just like the money movement numbers being a lot bigger than the dividend figures. Nevertheless, can wholesome quantities of money movement proceed?
Investing for progress
Traders seem like a bit unsure about that judging by the latest drop within the share worth. Maybe the corporate’s technique replace launched on 7 April 2024 explains among the concern.
The administrators intend to extend capital expenditure in an effort to construct future progress and “enhance returns for shareholders”. A part of the plan entails opening round 75 new Sainsbury’s native comfort shops over the following three years.
Will elevated capital expenditure compete with the money accessible for dividends? Perhaps. However the firm expects money movement to extend as earnings develop.
The administrators, in the meantime, declared their dedication to a progressive dividend and share buyback coverage. They stated: “a higher level of capital investment is balanced with a reinforced commitment to strong free cash flow generation and stronger returns for shareholders”.
In additional element, the concept is to start growing dividends from the beginning of the brand new buying and selling yr on the finish of February 2024. On high of that, a £200m share buyback programme will unfold over the course of the following buying and selling yr to February 2025.
There’s no point out I can see of rebasing the dividend decrease earlier than elevating it incrementally! In the meantime, Metropolis analysts have pencilled in an uptick within the shareholder cost for the approaching yr.
There are uncertainties, in fact. However on steadiness, I see J Sainsbury as value dividend traders’ additional analysis time now.
