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Is J Sainsbury plc A Safe Dividend Investment?

Sainsbury'sThe London-listed supermarkets are under the cosh right now with big players Tesco and WM Morrison Supermarkets taking the worst of the battering.

Share prices are well down this year for both of them, but down too is the quality player, J Sainsbury’s (LSE: SBRY), and I think the drag of sector weakness is starting to make Sainsbury’s look like a screaming value opportunity.

Faults in the competition

Everyone seems worried about the threat from discounters such as Lidl, Aldi and others, but when we go to those places, the shopping experience feels inferior. For a start, they don’t stock everything a typical grocery shopper needs. That’s inconvenient and means we must shop again. Then we look at pricing — sure, some stuff seems cheaper at the discounters, but some stuff isn’t.

Next, we arrive with a full trolley at the checkout. Oddly, there’s often a can’t-load-into-bags rule and our delicate foodstuffs are snatched from the conveyer belt and hurled loose back into the trolley, passing the bar-code-recording machine with the velocity of a diving Tornado jet — all in the name of speed and efficiency. The final experience is a cramped fudge around trying to get the contents of a fully laden trolley into bags before leaving the store, without crashing into other similarly fudging-around shoppers, or doing the same at the boot of the car without being run over by vehicles parking or leaving.

My guess is that the rise of the so-called deep discounters won’t see off the traditional supermarket experience in the long run. Quality of experience will win out, and that’s an area of consideration that Sainsbury’s dominates.

Appealing figures

City analysts following Sainsbury’s expect earnings to slide 8% during the current trading year and a further 3% the year after that. They expect the firm to slice around 8% from the dividend, too. But even on those reduced expectations, the forward dividend yield is running at about 5.4% and forward earnings cover the payout 1.8 times.

The thing to remember is that Sainsbury’s has enjoyed a long run of rising earnings thanks to a successful expansion campaign and what looks like slick execution of its operations. Going into the current sector-wide period of trading weakness Sainsbury’s seemed like the fittest and strongest of the four big chains operating in Britain, and I think such operational and strategic strength will see the firm through.

An evolving business

Sainsbury’s is well ahead with developing complementary, high-growth sales channels alongside its traditional big-store supermarket business. Last year, 91 new Sainsbury’s convenience stores joined the estate taking the total beyond 600, a figure that means the firm now has more convenience stores than large supermarkets. That’s significant when we compare the firm’s strategy to Morrisons, for example, a company often criticised for being late to develop fast-growing alternative routes to market.

With its groceries online offering Sainsbury’s sales breached the £1 billion barrier as they grew by more than 12% during the year — significant progress, which puts the firm on a competing footing with the likes of Tesco in that area. 

Sainsbury’s is evolving to tackle the changing market place and, judging by its stellar past record of business execution, I think the firm’s strategy is capable of prevailing in the long term, which starts to make the firm’s recent share-price weakness (which is touching a support level on the chart) seem like a decent buying opportunity.

After all, investing nirvana is to buy good, solid companies when they are out of favour. There’s nothing more out of favour than the supermarket sector right now and, in my view, Sainsbury’s is the pick of the bunch.

What now?

I think J Sainsbury’s looks attractive, but we all need to make our own investing decisions. That said, considering a range of views about investing can be informative and pay off best.

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Kevin Godbold 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.