What Are J Sainsbury plc’s Dividend Prospects Like Beyond 2014?

sainsburyToday I am looking at British grocery leviathan J Sainsbury‘s (LSE: SBRY) (NASDAQOTH: JSAIY.US) dividend outlook past 2014.

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Unlike many of its mid-level supermarket peers, J Sainsbury has found the right recipe to keep sales growing despite the growing presence of budget retailers like Aldi and high-end outlets such as Waitrose. Indeed, the firm punched record sales in the week leading up to Christmas, a performance that helped push total sales 2.7% higher in the 14 weeks to January 4.

This ability to defy the effects of intensifying competition — not to mention constraints on shoppers’ pursestrings — has enabled it to grow earnings steadily in recent years. And City forecasters expect this trend to continue, with the firm anticipated to follow up a 5% increase for the year concluding March 2014 with growth of 6% and 5% in 2015 and 2016 respectively.

Consistent growth has enabled Sainsbury to consistently build its dividend over many years, and the company boasts a compound annual growth rate of 6.1% dating back to 2009. And brokers expect the group to lift this year’s full-year payout 5.4% to 17.6p per share, before raising the dividend by 4% in 2015, to 18.3p, and by 2.7% the following year, to 18.8p.

These predicted payments, if realised, provide long-term dividend yields well above the market average — the FTSE 100 currently sports an average forward yield of just 3.2%. By comparison, Sainsbury’s expected dividends through to 2016 carry yields of 5.1%, 5.3% and 5.4% for each of these years.

Cautious share dealers will point out that dividend cover of 1.8 times projected earnings — below the generally-regarded safety benchmark of 2 times — over the next three years is insufficient given the uncertain backdrop for Britain’s ever-shrinking middle-tier grocery space. Still, it is worth bearing in mind that these readings are still above the firm’s recent historical average.

Furthermore, the company’s ability to churn out plenty of cash should also soothe fears over earnings pressure on future dividends. Sainsbury generated free cash flow of £180m during March-September, a substantial improvement from £10m during the corresponding 2012 period.

Although dividend growth is expected to slow in the coming years, I believe that the stonking yield on offer still makes Sainsbury a premier dividend buy. It is true that the rising threat from both the top- and bottom-end of the grocery market is set to intensify in coming years, but I believe that Sainsbury’s massive investment in the red-hot online and convenience sub-sectors — not to mention intensive brand development programme — should continue to deliver robust growth over the long term.

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> Royston does not own shares in any of the companies mentioned in this article.