J Sainsbury plc and SSE plc: 2 buy-and-forget dividend stocks for difficult times

Roland Head looks at the latest figures from J Sainsbury plc (LON:SBRY) and SSE plc (LON:SSE). How safe are these desirable dividends yields?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

With Brexit on the horizon, and a shock win in the US for Donald Trump, markets are likely to remain volatile for the foreseeable future. If you still need stable returns from your shares during this troubled period, it probably makes sense to focus on ‘boring’ income stocks.

I reckon that UK-focused dividend heavyweights SSE (LSE: SSE) and J Sainsbury (LSE: SBRY) could be ideal buys. Both companies issued interim results this morning. In this article I’ll take a closer look at the latest figures, and consider the outlook for each stock.

Inflation pressures hit profits

Sainsbury’s was the biggest faller in the FTSE 100 this morning, shedding more than 5% after admitting that underlying pre-tax profit fell by 10% to £277m during the first half, missing consensus forecasts of £282m.

Although Sainsbury’s reported sales rose by 1.8% to £12,642m, like-for-like sales from Sainsbury’s stores fell by 1% during the period. There was no detail on trading at Argos, which has only been part of the group since the start of September.

Second-half profits are expected to be lower than those reported for the first half, as the weaker pound means that import costs are rising. Like all supermarkets, Sainsbury’s is under pressure to keep retail prices low, which means the group’s profits margins are likely to fall. Despite this, Sainsbury still expects to meet current consensus forecasts for the full year.

This might seem unlikely, but today’s underlying earnings of 11.2p per share account for more than half of the full-year earnings of 20.5p per share shown in current market forecasts. Sainsbury only needs to generate underlying earnings of 9.3p per share during the second half in order to match current expectations. Given that this period includes the key Christmas trading season, this shouldn’t be an impossible target.

Assuming current guidance is maintained, Sainsbury’s shares now trade on a forecast P/E of 11.7, with a prospective dividend yield of 4.2%. This seems reasonable value to me.

How safe is this 5.8% yield?

SSE’s inflation-linked dividend policy is one of the cornerstones of its investment appeal. Wednesday’s interim results confirmed this policy is still in place. The interim payout rose by 1.9% to 27.4p per share. This puts investors on track to receive a forecast full-year payout of 90.5p, equivalent to a 5.8% yield.

Adjusted earnings are expected to rise slightly this year, but it seems this will be dependent on a strong winter performance. SSE’s adjusted earnings fell by 25.5% to 34.2p per share during the first half. The company said that this was due to a fall in renewable energy output, lower retail customer numbers and “an unusually high proportion” of debt interest payments during the first half.

SSE confirmed this morning that it expects to report adjusted earnings of “at least” 120p per share for the 2016/17 year, in line with consensus forecasts of 121p. This puts SSE shares on a forecast P/E of 13, with a prospective yield of 5.8%. As a long-term shareholder myself, I remain happy. I may consider adding to my holding if the share price falls any further.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares of SSE. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »