Why Is J Sainsbury plc So Cheap?

Perusing some FTSE 100 statistics, I was surprised to find J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) on a forward price to earnings (P/E) ratio if just a tad over 11.

This is a very strong company selling that defensive staple of staples, food, and at 328p its shares are trading on a P/E that’s significantly lower than the FTSE 100’s long-term average of 14.

Great dividends

SBRYAnd what’s more, Sainsbury’s provided shareholders with a very nice 5.5% dividend yield for the year just ended in March, while the FTSE only managed an average of 3%. And though there are slightly lower dividends forecast for the next two years, they should still yield more than 5%.

It’s not like those dividends are stretched, either — the payout for March 2015 should be around 1.8 times covered.

Wednesday’s first-quarter trading update told us of a 1.1% fall in like-for-like sales as shoppers are still very cautious at this stage in our economic recovery, and we heard that chief executive Justin King is to step down after 10 years. But the share price has actually been on a slide since last last year — so why?

Sainsbury’s is no Tesco

Tesco‘s slump I can understand, with the UK’s largest supermarket genuinely suffering a downturn in fortunes that’s taking longer to shake out than many expected (but even then, I think the shares are oversold).

But Sainsbury’s is the one that won the “Supermarket of the Year” award last year for the sixth time in eight years, was named “Online Retailer of the Year” in the Grocer Gold Awards for the second successive year, and got the “Convenience Retailer of the Year” nod in the Retail Industry Awards.

We’ve also seen earnings per share (EPS) rising year-on-year, often in double digits, with that handsome dividend keeping pace. There’s a 7% EPS fall forecast for the current year, but that’s pretty minor in the overall scheme of things, and growth is expected to resume the year after.

Expansion going well

The threat to big supermarkets from convenience shopping is a key concern, but Sainsbury’s is leading there, too — in the first quarter of this year, the company opened 27 new convenience stores and refurbished a further 12, and says it is on track to open two new convenience stores per week.

Investors just seem to be turned off from the supermarket sector at the moment, and I think that’s a mistake.

There’s nothing wrong with Sainsbury’s — there aren’t many companies where you can get a safe 5% dividend yield for a P/E of 11.

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Alan does not own any shares in J Sainsbury or Tesco. The Motley Fool owns shares in Tesco.