Is J Sainsbury plc A Super Income Stock?

Does J Sainsbury plc (LON: SBRY) have the right credentials to be classed as a very attractive income play?

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As all Foolish investors know, all good things must come to an end.

Indeed, this was the case for J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) as it recently reported its first decline in like-for-like sales for over nine years. Like-for-like sales for the ten weeks to March 15 were down by 3.1% excluding fuel, which highlights just how challenging the UK supermarket sector is at the moment.

Shares fell on the news and are now down by 15% for the year. However, does this fall now make them more attractive as an income play? Is Sainsbury’s a super income stock?

A Great Yield

With a yield of 5.6%, Sainsbury’s certainly offers a great income at current price levels. That not only beats the FTSE 100 yield of 3.5%, but is also well-ahead of inflation and easily above the best rates offered by a typical high street bank account.

sainsbury'sFurthermore, Sainsbury’s adopts a relatively conservative policy when it comes to deciding the proportion of earnings that are to be paid out as a dividend. For instance, in the 2014 financial year, Sainsbury’s is expected to have paid out around 55% of net income as a dividend. This seems to be rather conservative and, with capital expenditure levels set to be lower in future years (as the company reduces its expansion into vast, out-of-town shopping centres), Sainsbury’s could afford to pay out a higher proportion of net profit as a dividend.

For instance, a dividend payout ratio of two-thirds could be the optimum level and would mean sufficient reinvestment in the business as well as an even higher yield for shareholders.

A Lack Of Growth?

Where Sainsbury’s disappoints is with regards to its dividend growth forecasts. For example, dividends per share are expected to fall by just over 2% in 2015, before increasing by 3.5% in 2016. This means that, while the company’s current yield is very impressive, it is forecast to remain at current levels (assuming a flat share price), which equates to a fall in real terms (when inflation is taken into account) over the next two years.

Looking Ahead

Trading on a price to earnings (P/E) ratio of just 9.7, Sainsbury’s is cheap — especially when compared to the FTSE 100’s P/E of around 13.5. Although dividends are expected to grow only marginally over the next two years, there is scope for an increased proportion of earnings to be paid out as a dividend. This, coupled with a great yield of 5.6%, means that Sainsbury’s is still a super income stock.

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.

Peter owns shares in J Sainsbury.

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