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J Sainsbury plc’s Dividend Prospects For 2014 And Beyond

Many top FTSE 100 companies are currently offering dividends that knock spots off the interest you can get from cash or bonds.

In this festive series of articles, I’m assessing how the companies measure up as income-generators, by looking at dividends past, dividends present and dividends yet to come.

Today, it’s the turn of supermarket J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US).

Dividends past

The table below shows Sainsbury’s five-year earnings and dividend record.

  2008/9 2009/10 2010/11 2011/12 2012/13
Underlying earnings per share (EPS) 21.2p 23.9p 26.5p 28.1p 30.7p
Dividend per share 13.2p 14.2p 15.1p 16.1p 16.7p
Dividend growth 10.0% 7.6% 6.3% 6.6% 3.7%
Dividend cover 1.61x 1.68x 1.75x 1.75x 1.84x

As you can see, Sainsbury’s has increased its dividend every year for the last five years. The average annual increase comes out at 6.8% — well ahead of inflation. You may also have spotted the trend of rising dividend cover.

Sainsbury’s found it necessary to slash its dividend by 50% for 2004/5, as a result of a collapse in earnings. Under new management, earnings have recuperated, and the board has been gradually increasing dividend cover — that’s to say, lifting the dividend at a slower rate than EPS. The target is to have the dividend twice covered in the medium term.

A solid dividend-growth performance — while increasing the safety of the dividend with more robust cover.

Dividends present

For the current year (ending March 2014), the company has already declared an interim dividend of 5p a share, reflecting the board’s policy of paying 30% of the prior full-year dividend at the halfway stage.

Analysts are expecting a final dividend of 12.6p when the company announces its annual results on 7 May– giving a 2013/14 full-year payout of 17.6p (up 5.4% on last year). Meanwhile, underlying EPS is expected to rise by 7.5% to 33p, increasing dividend cover to 1.87.

At a share price of 390p, Sainsbury’s current-year dividend represents a yield of 4.5%.

Dividends yet to come

Analysts have pencilled in Sainsbury’s 2014/15 dividend to rise by 4% to 18.3p, with EPS rising 6.1% to 35p. That would see dividend cover edging up again — to 1.91 — keeping the company on track to meet the medium-term target of a twice-covered dividend.

With the prevailing dividend-cover policy, and with Tesco‘s dividend currently static and Morrisons‘ earnings forecasts being unpromising for serious dividend increases, there’s every incentive for Sainsbury’s to err on the side of modest dividend growth — perhaps even a little below analyst forecasts.

A further factor suggesting that caution on the dividend could be prudent is the mounting pressure on the middle-market supermarkets from high-end Waitrose and Marks & Spencer, and discounters Aldi and Lidl; and the risk that an increasingly desperate Tesco could launch a damaging price war.

Sainsbury’s shareholders can be optimistic about at least modest annual dividend increases, until such time as the dividend-cover target has been reached. However, if we are seeing a structural shift to more intense competition in the supermarket sector, modest dividend growth — by which I mean a little ahead of inflation — may be the norm, even in benign economic times.

However, I have to tell you our leading income analysts have identified one British supermarket as such a high-quality business that it belongs within an elite group of just five FTSE 100 companies set to deliver superior long-term earnings and dividend growth.

If you'd like to discover the names of the companies in question, and enjoy reading an in-depth analysis of the five dividend dynamos, you can help yourself to this free Motley Fool report.

The report comes with no obligation and can be in your inbox in seconds -- simply click here.

> G A Chester does not own shares in any company mentioned. The Motley Fool owns shares in Tesco and has recommended shares in Morrisons.