Supermarket chain J Sainsbury (LSE: SBRY) has a weak share price and it’s been falling. However, this may be a suitable time for patient investors to focus on the stock.
The decline is troubling when we’ve been enjoying a bull market for many companies. Meanwhile, yesterday’s (2 July) first-quarter trading update contains news that may keep investors wary of the stock for a while.
The FTSE 100 firm said sales declined by just over 6% in its Argos division. Seasonal sales were “significantly” lower with weaker consumer electronics demand, particularly in gaming.
The period covers the 16 weeks to 22 June, but the directors said the figures were up against a “particularly strong” comparative period a year earlier.
Gaining market share in grocery
It seems the cost-of-living crisis is still playing out for non-essential products retailing. Similar updates arrived recently from others selling discretionary goods. One that caught my eye is Topps Tiles, which is also struggling.
It isn’t all bad news in Sainsbury’s update, though. There was “strong, sustained” momentum in grocery sales, and volumes grew for a second year. The directors reckon the business scored the biggest market share gains of any UK grocer during the quarter.
Year-on-year grocery sales rose by a comforting 4.8%. After balancing grocery against discretionary sales, the overall like-for-like sales performance for the period was a gain of 3% — so that’s a positive.
One of the key attractions of this stock is the dividend. Even though earnings look set to decline in the current trading year, City analysts forecast single-digit percentage increases for the shareholder payment both this year and next.
With the share price near 252p, the forward-looking dividend yield is about 5.6% when set against those analysts’ estimates.
The income potential for investors is appealing. I think Sainsbury’s is well worth further research because it operates in a defensive sector with its grocery division. Perhaps the stock could sit well in a diversified portfolio of dividend-paying shares focused on the long term.
Shareholder returns ahead
But on top of the dividends, during the quarter the company started its previously announced £200m share buyback programme. I think that could be well timed because the valuation doesn’t look excessive here.
There’s more to come, too. The firm expects to return a further £250m to shareholders when it completes the sale of its core banking business to Natwest. The directors announced the deal on 20 June.
To me, Sainsbury’s looks interesting, and it passes my personal rule of requiring a dividend yield above 5% for supermarket investments.
But there are risks to consider. Perhaps the biggest is the grocery sector being fiercely competitive. Sainsbury’s has been making decent market share gains recently. But most of the major supermarkets have previously demonstrated their ability to get in trouble with declining profits.
Nevertheless, despite the uncertainties, I reckon Sainsbury’s is a stock for income-focused investors to consider now.
