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J Sainsbury plc Could Be Worth 613p

J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) shares have been recovering over the past couple of months, but after a slide that started late in 2013 they’re still down 10% over the past year, to 335p today.

Even over five years, we’ve only seen a 10% price rise, while the FTSE has climbed by around 55%. Sainsbury’s shareholders, however, have been enjoying dividend yields of about 5% which have beaten the FTSE’s average of nearer 3%, and that’s a pretty nice return — and unusually high for a supermarket.

Bargain?

sainsbury'sDoes that mean we’re looking at a bargain here? With the shares on a forward P/E of only 11.5, we could be, so let’s see what Sainsbury’s shares might be worth in another five years time.

We’ve already seen five years of strong earnings per share (EPS) growth, of between 6% and 13% per year. Although there’s a small fall in EPS predicted for the year ending March 2015 and a flat year penciled in to follow, growth is expected to continue over the next five years — and going by the latest City forecasts, an EPS figure of 37p per share by March 2109 wouldn’t seem too far-fetched.

If the shares are a bit cheap as I suspect, we could also see the price returning to an average P/E of around 14 over the same period. That would suggest a share price of 518p, which is up 55% on the current price of 335p — and that’s pretty much bang on the FTSE’s return over the past five years, so we could be looking at a reversal in relative performances.

Add in the cash

Then, of course, there are those dividends to add on top of any share price rise — and the consensus is that the annual cash payment will carry on rising nicely. In fact, forecasts are predicting something like a total of 95p over the five-year period. And if we add that to the mooted 518p share price, we’d take the value of a Sainsbury’s share as high as 613p for an overall 83% gain — and I don’t see the FTSE matching that with dividends included over the next five years.

While that might make Sainsbury’s sound like a reasonable investment right now, brokers are pretty non-committal at the moment, with the majority sitting on a Hold stance and only a few venturing either side of that.

Looking attractive

But those dividend yields are very attractive for the supermarkets, and the whole sector looks out of favour these days — shares in Tesco and Wm Morrison are similarly depressed. With the UK returning to growth, now might turn out to be a good time to get into a supermarket recovery.

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Alan does not own any shares in any companies mentioned in this article. The Motley Fool owns shares in Tesco and has recommended shares in Morrisons.