How Will J Sainsbury Plc Fare In 2014?

For most shares in the FTSE100 2013 was a good year and investors have likely enjoyed capital gains and rising dividend income.

That makes me nervous about investing for 2014 and beyond, and I’m going to work hard to adhere to the first tenet of money management: preserve capital.

To help me avoid losses whilst pursuing gains, I’m examining companies from three important angles:

    1. Prospects
    2. Risks
    3. Valuation

Today, I’m looking at UK supermarket operator J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US).

Track record

With the shares at 369p, Sainsbury’s market cap. is £7,014 million.

This table summarises the firm’s recent financial record:

Year to March 2009 2010 2011 2012 2013
Revenue (£m) 18,911 19,964 21,102 22,294 23,303
Net cash from operations (£m) 918 1,006 854 1,067 981
Adjusted earnings per share 21.2p 23.9p 26.5p 28.1p 30.7p
Dividend per share 13.2p 14.2p 15.1p 16.1p 16.7p

1. Prospects

When I think of J Sainsbury these days, I think of a supermarket chain that is getting the basics right in a competitive market and consistently beating its competitors on growth.

The third-quarter update demonstrates that Sainsbury is still playing true to form: total sales are up 2.5% with a flat like-for-like sales result. Trading was tough over the period and Sainsbury’s performance compares well to the likes of Morrison and Tesco.

The CEO reckons that sales in the firm’s convenience-store business are growing at nearly 18 per cent and at over 10% in the on-line business, both of which are encouraging. Continuing growth will depend on the success of such peripheral areas of business alongside the company’s traditional supermarket core. Last year around 4.3% of sales came from non-food general merchandise, which is an area of business growing at twice the rate of its grocery offering. The firm’s on-line operation contributed around 4% of sales, and there’s also a fledgling banking business.

In the quarter to January, progress continued with Sainsbury adding 555,000 square feet of new trading space, comprising six supermarkets, four extensions, and 19 convenience stores. The CEO reckons the company looks on course to meet its target of around a million square feet of new space by the end of the year.

Steady growth is what we’ve come to expect from Sainsbury in recent years and that makes me optimistic about the company’s prospects for 2014 and beyond.

2. Risks

The supermarket sector is characterised by high volumes, high costs and wafer thin margins. It doesn’t take much to derail a profit result in any given reporting period: maybe a mis-targeted marketing campaign, a mis-judged pricing policy, or an eye that strays from the basics, allowing standards to slip. We’ve seen the outcome of such blunders with some of Sainsbury’s competitors. The main risk is that something like that happens at Sainsbury to cause its current upwards business trajectory to stall. Under such conditions, the share price is unlikely to be forgiving.

3. Valuation

The forward dividend yield for year ending March 2016 is running at around 5.1%. City analysts expect forward earnings to cover that dividend payout about 1.9 times.

You can buy into that income stream for a forward P/E multiple of just over ten, which looks fair compared to earnings growth expectations of 5% and that fat yield.

What now?

The share price has eased recently and that yield does look tempting at J Sainsbury.

In fact, I'm considering the company alongside some other reliable, cash-generative dividend payers highlighted in a special Motley Fool Report.

Sainsbury strikes me as being a quality operation performing well in its sector. To find out the identities of five other top-of-their-game operators that our top analysts have identified, click here.

Kevin does not own any shares in J Sainsbury.