FTSE 100 supermarket J Sainsbury’s (LSE: SBRY) shares are down 18% from their 10 September 12-month traded high of £3.01.
As a stock’s dividend yield rises when its share price falls, this has pushed its payout up to 5.3%, and it could turn out to be very lucrative over a 30-year timeframe.
Good news from my perspective as a high-yield-focused investor is analysts forecast these payouts will keep rising to 2028.
Specifically, the projections are that the dividends will increase to 14.2p in 2026, 15.3p in 2027, and 15.8p in 2028.
These would generate respective yields on the current £2.46 share price of 5.8%, 6.2%, and 6.4%.
How much dividend income could be made?
Ignoring these forecasts and using the current 5.3% yield means £10,000 in the stock would make £530 in first-year dividends.
On the same average yield, this would rise to £5,300 over 10 years and to £15,900 after 30 years.
This is a lot more than can be made in a standard UK bank savings account, of course. It is also more than is currently available from the ‘risk-free rate’ – the 10-year UK government bond – which yields 4.6%.
How much could be made with compounding?
However, even more could be made if investors used a standard market practice called ‘dividend compounding’.
Using this method on £10,000 at a 5.3% average yield would produce £6,970 in dividends, not £5,300, after 10 years.
This would increase to £38,866 after 30 years on the same basis, rather than £15,900.
With the £10,000 initial stake included, the Sainsbury’s holding would be worth £48,866 by that point. And this would pay £2,590 a year in dividend income.
Is there value in the shares?
My starting point in establishing whether value remains in any stock is to compare its key valuation measures with its competitors.
Surprisingly to me given its success over the years, Sainsbury’s price-to-book ratio is just 0.8. This is joint bottom of its peer group, which averages 1.8. The group comprises Carrefour at 0.8, Tesco and Koninklijke Ahold Delhaize at 1.9, and Marks and Spencer at 2.5.
So, Sainsbury’s looks full of value on this measure.
Its 0.2 price-to-sales ratio is also undervalued compared to its competitors’ average of 0.3.
But on the price-to-earnings ratio, it looks overvalued at 30.8 against its peers’ average of 14.4.
To get to the bottom of its valuation, I ran a discounted cash flow (DCF) analysis.
Using other analysts’ figures and my own, the DCF shows Sainsbury’s shares are 53% undervalued at their current £2.46 price.
Therefore, their fair value is £5.23, although market forces could move them lower or higher.
Will I buy the stock?
A firm’s earnings ultimately drive its dividend and share price over time. A risk to Sainsbury’s is a surge in the cost of living that could reduce consumer spending.
However, consensus analysts’ forecasts are that its earnings will increase by 17.5% year to the end of the fiscal year 2027/28.
I am happy with the high-yield stocks I have in my portfolio. However, I have added Sainsbury’s to my watchlist to buy if one of these stocks consistently underperforms.
