Why J Sainsbury plc Should Be A Winner Next Year

What does 2014 have in store for our top companies?

I’m examining just that and taking a look at what’s behind the City’s latest forecasts. Today it’s time for a peek at J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US).

Here’s a look at the past five years of results from the supermarket chain, together with forecasts for this year and next:

Mar Pre-tax EPS EPS Growth
Dividend Dividend
£466m 21.2p 8% 13.2p   4.2% 1.6x
2010 £733m 23.9p 13% 14.2p 7.6% 4.3% 1.7x
2011 £827m 26.5p 11% 15.1p 6.3% 4.3% 1.8x
2012 £799m 28.1p 6% 16.1p 6.6% 5.3% 1.7x
2013 £788m 30.7p 9% 16.7p 3.7% 4.6% 1.8x
£622m 32.7p 9% 17.7p 6.0% 4.5% 1.8x
£666m 35.0p 7% 18.4p 4.0% 4.7% 1.9x

* forecast

Over the past five years the Sainsbury share price has lagged the FTSE 100 — it has gained a little more than 25% after dipping quite badly in 2011, with the index up 50%.

But since the slump, Sainsbury has been bouncing back. Over the past two years, the supermarket’s shares have put on 32% with the FTSE up just 20%, and in the last 12 months we’re looking at 13% against the index’s 11%.

Solid record

But all through, earnings per share have been steadily rising and the dividend has been growing significantly ahead of inflation. The yield of between 4% and 5% is firmly above the FTSE’s forecast average of 3.1% for this year too. And with it covered around 1.8 times by earnings, which seems ample for this kind of business, it’s looking like a pretty reliable income stream.

Those 2014 forecasts put Sainsbury shares on a forward P/E of under 12, with the following year’s predictions dropping it to 11. That’s not much higher than Tesco, which is currently out of favour with investors, and it’s below Sainsbury’s longer term trend.

Even after a couple of years of good share price growth, I still reckon the shares are good value and I think they’ll advance further next year.

But what evidence is there to support a prosperous 2014?

Gaining ground

J Sainsbury released first-half results on 13 November, and they were looking good. Total sales were up 4.4% with like-for-like (excluding fuel) up 1.4%. Underlying pre-tax profit gained 7% to £400m, with underlying earnings per share up 9.2% to 16.6p. The interim dividend was lifted 4.2% to 5p per share.

And supporting those who think J Sainsbury is on for even better things, the company revealed that it has increased its market share to 16.8%, which is its highest for 10 years, and it has enjoyed 35 consecutive quarters of like-for-like sales growth.

Throw in awards for Supermarket of the Year for the sixth time in eight years, Convenience Chain of the Year for four years in a row in the Retail Industry Awards, and Online Retailer of the Year for the second consecutive year in the Grocer Gold Awards, and we have a company that is clearly thought of as one of high quality.

The feel-good factor

And that’s surely what the shoppers are going to want over the next few years, now that economies are starting to pick up and their pockets are feeling a little fuller — people like things to be a nicer than average and to feel they’re moving upmarket a little.

Verdict: Watch your back, Tesco!

And finally...

While Sainsbury and the supermarket sector are looking good for next year, we could be on for an even better year from the banking sector. After years of being scum in many people's eyes, profits are coming back and we might even see taxpayers doing well from their stakes in the bailed-out two.

To help set you up for a solid New Year of investing, we have produced the all-new "Motley Fool’s Guide to Investing in Banks", which takes a look at the UK's top five.

Want to know which one would be best for your money? Click here to get your personal copy of the new report today.

> Alan does not own any shares mentioned in this article. The Motley Fool owns shares in Tesco.