A 5.4% Dividend From J Sainsbury plc!

The supermarket sector has been having a tough time of late, but that hasn’t stopped the analysts from forecasting a healthy 4.1% rise in this year’s dividend payout from J Sainsbury (LSE: SBRY).

SBRYShow us the cash

The predicted dividend, of 17.4p per share, would provide a 5.4% yield on the current share price of 333p, and that’s high by the historical standards of the sector. What’s more, a forecast 32p in earnings per share (EPS) would put the shares on a forward P/E of only around 10.5, and that’s low compared to both the sector’s past and the FTSE 100 as a whole — the index has a long-term P/E average of around 14.

Back in 2009, Sainsbury provided shareholders with a 4.2% dividend yield from shares on a P/E of 14.8, and that’s more like the longer term picture.

The reason for the relatively bearish stance right now? Well, we’re heading from a period of strong annual earnings growth to a bit of a flat spell — this year’s earnings should be up by a modest 4%, but for 2105 we have a drop of 4% right back again on the cards, followed by zero growth in 2016.

A brighter horizon?

With results due on 7 May, forecasts for this year are unlikely to be far out — and the range of individual forecasts is pretty tight. But what prospects are there for a brightening outlook for 2015 and beyond?

Well, expectations for this year and next have actually been scaled back over the past 12 months, so if the trend continues then we shouldn’t expect much of a return to optimism. In fact, the 2015 figure for EPS stood at 33.3p a year ago, and now it’s down to 30.8p — it’s not a big change, but a shift of that magnitude can turn a small growth into a small shrinkage.

The balance of recommendations is pretty evenly spread too, with few going out on a limb to suggest either buying or selling the shares — of 20 forecasting, we have six suggesting we should buy, five telling us to sell, with the other nine sitting on the fence that is Hold.

They’re too cautious

With Sainsbury’s recent fourth-quarter update telling us of continued tough market conditions, some caution in those recommendations is perhaps understandable.

But when you have a reliable company like J Sainsbury offering a well-covered dividend of 5.4%, the shares just seem too cheap to me — in lower-yield times, people would pay well for that level of income.

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Alan does not own any shares in J Sainsbury.