5.2% dividend yields! Should I buy this cheap FTSE 100 share?

This FTSE 100 dividend share has risen in price recently. Yet at current levels it still looks extremely cheap on paper. Is now the time for me to jump in?

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The outlook for FTSE 100 share J Sainsbury (LSE: SBRY) is looking fragile as the cost of living crisis worsens.

The question is whether or not the supermarket giant’s cheap share price still makes it an attractive investment. At 242p per share, Sainsbury’s trades on a forward P/E ratio of 11.1 times. The FTSE 100 firm also boasts an 5.2% dividend yield.

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However, I think the rising threat to J Sainsbury’s thin margins makes it a bad share for me to buy, despite that cheap price.

Middle of the road

The threat to its profits has been mounting over the past decade. The rapid store expansion over at Aldi and Lidl have both weighed on the grocer. So has the emergence of internet-only operators like Ocado and the entry of established rivals like Morrisons online.

As of April, J Sainsbury’s market share came in at 15%, according to Kantar Worldpanel. This is down around 1.5% in just 10 years.

Mid-level retailers like Sainsbury’s have also been damaged by growing demand for premium products. Upmarket chain Waitrose has grown its market share around half a percentage point over the last decade (to 4.8% as of April) as affluent shoppers have left J Sainsbury and its peers.

Slipping market share

The UK’s traditional firms like Sainsbury’s have invested heavily in controlling prices to win shoppers on a budget. They have also spent massive sums on boosting their premium ranges to appeal to better-off shoppers.

It’s possible this strategy could help it recover strongly this decade. But, so far, J Sainsbury has proved less successful than rivals such as Tesco and Asda in beating back these twin threats. This explains why the Sainsbury’s share price has slumped by almost 20% over the past 10 years. By comparison, Tesco’s dropped by mid-single-digit percentages.

I’m worried about how Sainsbury’s can bounce back as competition in the British grocery industry intensifies. The more recent entry of Amazon — both in cyberspace and on the high street — poses a potentially cataclysmic threat for the 2020s and beyond too.

As someone who invests with a long-term view, these competitive pressures represent real worry to me. There seems to be little to celebrate with Sainsbury’s from a near-term perspective either, as the cost of living crisis worsens.

A high-risk FTSE 100 share

A Sky News poll has shown that a quarter of adults in the UK are already skipping meals. With inflation tipped to keep rising, food retailers face a growing threat to revenues moving through 2022, at least. Sainsbury’s for one can expect to keep to lose more and more business to the discount retailers in this climate.

Sainsbury’s warned in late April that underlying pre-tax profit will range £630m-£690m this fiscal year. That’s down from £730m last time around. But with shopping budgets falling and food prices rising, I think profits could fall even further.

I expect the Sainsbury’s share price to continue falling. So I’d much rather buy other FTSE 100 shares today.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon, Ocado Group, Sainsbury (J), and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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 considered, so you should consider taking independent financial advice.

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