J Sainsbury Plc’s 2 Greatest Strengths

SBRYWhen I think of UK supermarket operator J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US), two factors jump out at me as the firm’s greatest strengths and top the list of what makes the company  attractive as an investment proposition.

1. Growth opportunities

Most big supermarket chains in Britain are struggling to maintain existing market share, let alone to grow. But Sainsbury stands out as one of the companies that are grabbing sales and customer loyalty from its competitors.

The firm’s CEO updated investors back in January and said that Sainsbury’s convenience-store business is growing at nearly 18 per cent and in its on-line business at over 10%. Progress on growth is a breath of fresh air in the supermarket sector right now.

All big supermarkets have to be creative to stand any chance of growing these days. It’s no good just throwing up bigger and bigger out-of-town stores in the belief that ‘if you build it, they will come’. Thankfully, Sainsbury realised this point long ago and is well ahead with developing alternative business formats. Last year around 4.3% of sales came from non-food general merchandise, which is growing at twice the rate of its traditional grocery offering. There’s also the firm’s on-line operation, which contributes a growing 4% of sales, and a small banking business too.

As well as new business areas, Sainsbury is winning in traditional supermarket trading. In the quarter to January, the firm added 555,000 square feet of new trading space, which included six supermarkets and four extensions, as well as 19 convenience stores. The firm is targeting a million square feet of new space by the end of its financial year.

At three-quarter time, overall sales were up 2.5% on the year-ago figure. I’m looking forward to the full-year results, due around the 7 May, to see if progress on growth continues.

2. Strong record of business execution

When I walk into a Sainsbury store, it feels different. I know that’s just anecdotal, but Sainsbury’s really does seem to be a slick operator. There’s evidence that the firm has been getting the basics right and pleasing its customers in the recent trading 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

It’s pleasing to see steady progress with the top line: without growth in revenue, any profit and cash flow growth initiatives would have a finite course to run. Cash flow is holding up well and the earnings-per- share figures are rising steadily along with the dividend.

Sainsbury is getting it about as right as you can get it within the supermarket sector. If such progress continues, investors can look forwards to a steadily rising dividend and share-price progress in the years ahead.

What now?

Sainsbury’s forward dividend yield of about 5.4% looks attractive.  

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 that's performing well in its sector. To find out the identities of five other intriguing investment opportunities that our top analysts have identified, click here.

Kevin does not own any J Sainsbury shares.