Is Top-Scoring FTSE 100 Share J Sainsbury Plc Still A Buy?

During 2013, I’ve looked at most shares in the FTSE 100 and graded them against these five quality and value indicators:

  • Dividend cover
  • Borrowings
  • Growth
  • Price to earnings
  • Outlook

Some companies scored highly against the “business quality” indicators of level of borrowings, earnings growth record, and outlook. Others scored highly against the “value” indicators of dividend cover and price-to-earnings ratio (P/E).

Quality and value in harmony

However, the most promising investment opportunities scored well on both business quality and value indicators.

In this mini-series, I’m revisiting some of the highest-scoring shares to look at events since the original article and to assess the quality of the investment opportunity now. Some of these high-scoring firms could be investment winners for 2014 and beyond so, today, I’m revisiting supermarket chain J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US), which scored 19 out of 25 in May. 

Sales growth remains on track

When I looked at UK-focused Sainsbury in May, the firm’s apparent ability to grow steadily in a competitive market impressed me. Happily, a recent update reports first-half total sales to 28 September up 4.4% and like-for-like sales up 1.5%, so growth appears to continue. We’ll learn more with the interim results later this month.

I’m keen to find out how the company’s expansion programme is going. Last year, it opened 14 new supermarkets, extended eight more, and opened 87 more of its fast-growing smaller-format convenience stores, which is a particularly interesting growth area. There’s also promising growth in non-food and on-line retailing to look out for, and a fledgling banking business.

Valuation unchanged

The share price has advanced about 4.2% to 396p since May, which leaves the forward dividend yield for year to March 2015 at an attractive-looking 4.6%. Forecasters expect forward earnings to cover the dividend around 1.9 times.  Investors can currently pick up this income stream for a forward P/E multiple of around 11.5, which looks up with earnings and yield expectations. Meanwhile, the last-reported net debt figure was running at around 2.5 times operating profit.

So my scoring for Sainsbury remains the same as in May: dividend cover 3/5, borrowings 3/5, growth 5/5, P/E 3/5 and outlook 5/5, for an overall score of 19 out of 25. In my view, the investment opportunity is therefore unchanged, which inclines me to continue being optimistic about Sainsbury’s total-return potential.

What now?

Sainsbury continues to win market share despite fierce competition in its sector, and looks like a steady dividend and earnings grower.

I'm considering it along with an idea from the Motley Fool’s top value investor who has discovered what he believes is one of the most alluring income generating share-plays on the London market.

He sets out his three-point investing thesis in a report called "The Motley Fool's Top Income Share", which I recommend to you for your own research and due diligence. The report, setting out the attractions of this dividend-generating star, is available now by clicking here.

> Kevin does not own shares in J Sainsbury.