J Sainsbury plc Dividends Are Set To Fall, But They Still Look Good

TSBRYhe latest forecasts suggest dividends from J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) will be clipped this year, but is that a problem?

Sainsbury is starting to feel the pinch along with the rest of the sector, and after five years of strongly growing earnings per share (EPS), there are falls of 7% and 2% forecast for the next two years. And the trend has been negative — six months ago the City was predicting two more years of rising EPS and rising dividends.

Let’s see what the dividend situation at Sainsbury is now looking like:

(to Mar)
Dividend Yield Cover Change
2011 15.1p 4.3% 1.75x +6.3%
2012 16.1p 5.3% 1.75x +6.6%
2013 16.7p 4.6% 1.84x +3.7%
2014 17.3p 5.5% 1.90x +3.6%
16.4p 5.7% 1.81x -5.2%
16.4p 5.6% 1.79x 0%

* forecast

Dropping shares

Despite expectations for the cash handout to fall back a little, the forward yield has been strengthening, but for a less-than-ideal reason — the Sainsbury share price is down nearly 25% over the past 12 months, to 295p.

Now that rival Tesco has slashed its latest interim dividend, and Morrison‘s is looking badly overstretched with many people expecting a cutback next week, the big question is whether Sainsbury will indeed pare back its payments.

With its results for the year ended March 2014, the company told us that it “intends to continue to increase the dividend each year and to build cover to two times over the medium term“, although it did admit that cover may fall for a year or two first — prior to its cut, Tesco’s dividend cover was about two times.

So on the face of it, then, there shouldn’t be anything to worry about, should there?

Things might change

Well, the year was Justin King’s last as chief executive, and policies like this can be changed pretty quickly if needed. And it might be wise for Sainsbury to pre-empt any possible new price war by first reducing its dividend costs.

But who said anything about a price war? The thing is, the Lidl/Aldi phenomenon is hurting Sainsbury too, because the two cut-price cheapies aren’t just selling the cheapest stuff around. They stock a lot of pretty nice stuff too — including some great chocolate at low prices. And earlier this year, my nearest Aldi was even selling cut-price skiing gear!

And the latest TV ads? One of those fancy “food markets”, selling nice things to a load of Sainsbury types — until it turned out it was all supplied by Lidl!

Still a strong business

So Sainsbury does need to be concerned, and a small dividend cut might indeed be on the cards. But some fears of that happening are already in the price, and with the shares on a forward P/E of only 10 (which is very similar to Tesco’s), I think Sainsbury is still looking in good shape for long-term investors.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares in Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.