This Week’s Top Blue-Chip Income Buy: J Sainsbury plc


I’m always on the lookout for big FTSE 100 companies when they’re being offered in the market at an attractive valuation for dividend investors. A little higher yield at the time you buy can make a big difference to the growth of your income stream over the long term.

Right now, I reckon J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) is looking a great buy for income.

Latest figures show the overall UK grocery market growing at its slowest rate since 2005; but not all supermarkets are struggling.

Sainsbury’s boasted above market-average growth for the 12 weeks to 2 February, while the other three of the ‘Big Four’ — Tesco, Wm Morrison and Wal-Mart-owned Asda — all lost market share.

The premium grocery market — notably Waitrose — has been growing strongly in recent years. Sainsbury’s, positioned at the higher end of the Big Four, has benefited. Tesco, Morrisons and Asda, have suffered from the increasingly fierce competition at the discount end, where Aldi and Lidl are thriving.

A great opportunity right now

Sainsbury’s shares, currently trading at 348p are close to their 52-week low, and some 15% off their high achieved as recently as November. Yet, in contrast to Tesco and Morrisons, where analysts’ earnings and dividend forecasts have been trending downwards, the forecasts for Sainsbury’s have remained steady.

The combination of Sainsbury’s fall in share price and unchanged dividend forecast has pushed up the yield — to above 5% for the company’s current financial year (ending March). That compares with a market average of little more than 3%. It’s not just Sainsbury’s shoppers who can Taste the Difference!

Furthermore, analysts are expecting Sainsbury’s to increase the dividend comfortably ahead of inflation — supported by earnings-per-share growth of 5% a year — out to March 2016.

The announcement last month that Sainsbury’s chief executive, Justin King, will be stepping down in July, after 10 very successful years at the helm, isn’t I think a huge concern. The business is well positioned, and the new chief exec, Mike Coupe, — currently the group’s commercial director — has, as Sainsbury’s put it: “worked hand-in-hand with Justin over the past decade and has a proven track record of success making him the natural choice to take the company forward”.

I think the recent weakness in the shares, pushing the yield up to over 5% makes Sainsbury’s a great buy for income investors right now.

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> G A Chester does not own any shares mentioned in this article. The Motley Fool owns shares in Tesco and has recommended shares in Morrisons.