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3 Numbers That Make J Sainsbury plc A Strong Sell

Today I am looking at why I believe J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) is a dicey stock selection.Sainsbury's

3

The fragmentation of the British grocery space has been playing out for some now, as Aldi and Lidl have been grabbing trade from bargain hunters and the likes of Marks & Spencer have enjoyed surging popularity in the premium goods segment.

And while significant own-brand product development and marketing at Sainsbury’s had enabled it to avoid the humiliation of plummeting sales seen at Tesco and Morrisons, signs are that the tide is beginning to shift here, too.

The London firm announced earlier this month that like-for-like sales declined for the third consecutive quarter during July-September, dropping 2.8% during the period. By comparison, Sainsbury’s had achieved 35 consecutive quarters of like-for-like sales expansion prior to the start of the year, underlining the growing success of the competition.

12,000

Undoubtedly the splendid success of the budget chains has been the undoing of the mid-tier retailers, a phenomenon that is dragging the market into an intense price war. Indeed, Sainsbury’s announced in September that it was cutting the cost of over 12,000 products, as well as plans to compare its prices with those at Asda instead of Tesco as part of its revamped price match programme.

However, these measures are destined to play havoc with margins at the firm, and still fails to match the significant price differences between the ‘Big Four’ retailers and the discounters. In my opinion Sainsbury’s will have to come up with something more to stem the tide of sales losses.

13.5

Against a backdrop of relentless earnings expansion in previous years, Sainsbury’s has been able to reward shareholders with relentless annual dividend growth.

But with a worsening trading environment set to batter the bottom line — earnings dips of 15% and 3% are pencilled in for this year and next — the supermarket is expected to follow rival Tesco and take the blade to the payout for the first time in donkey’s years.

Indeed, a dividend of 13.5p per share is anticipated by City brokers for the year ending March 2015, a figure that would translate to a 22% on-year drop. And an extra 5% fall, to 12.8p, is expected for the following 12-month period.

These numbers still create terrific yields of 5.9% and 5.6% respectively, comfortably beating the 3.5% FTSE 100 forward average. But investors should be prepared for more aggressive dividend cutting should the competition continue to up the ante and Sainsbury’s profits plummet further than projected.

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