Is J Sainsbury plc Set To Slice The Dividend?

Today I am looking at why I believe Sainsbury’s (LSE: SBRY) (NASDAQOTH: JSAIY.US) is in danger of slashing the dividend.Sainsbury's

Forecasts point to pummelled payouts

With Sainsbury’s previous resistance to the march of the discounters showing signs of serious erosion, I believe that a dividend cut at the firm is all but inevitable. And the City seems to be broadly in agreement with me, with the number crunchers also foreseeing a slew of payout cuts on the horizon.

Backed up by a steady swelling in the bottom line in recent years, Sainsbury’s has been able to lift the full-year payment at a compound annual growth rate of 5.1% during the past five years alone.

But with earnings expected to dive 16% during the current financial year, analysts predict that the payment will subsequently collapse 22% to 13.5p per share. An extra 7% earnings decline in the 12 months concluding March 2015 is predicted to herald a further 5% dividend cut to 12.8p.

These payments still create gigantic yields, however, with predicted dividends for this year and next creating readouts of 5.5% and 5.2% respectively. And with payments covered 2 times by projected earnings throughout this period — bang on the widely-regarded security benchmark — at face value investors can take confidence in these dividend estimates being met.

But should earnings disappoint during this period then dividend coverage at Sainsbury’s could start to look extremely flimsy.

Competition upping the ante

Indeed, latest Kantar Worldpanel statistics released this week did the company’s profit outlook no favours at all. These showed sales at the supermarket slide a colossal 3.1% during the 12 weeks to October 12, reversing from the 1.8% rise seen in the prior 12-week period and pushing its market share to 16.1% from 16.7% a year earlier.

Not surprisingly the data confirmed the relentless rise of the discounters, the primary bugbear for the country’s established ‘Big Four’ supermarkets — sales at Aldi and Lidl jumped 27.3% and 18.1% respectively during the period.

And worryingly for income investors, Sainsbury’s does not boast considerable balance sheet strength should a backcloth of escalating revenues pressure crush earnings. Net debt advanced £222m during the last year to a considerable £2.38bn, while operating cash flow dipped more than 3% to £1.23bn.

And with fewer customers setting foot through the door each week, the supermarket’s financial health — and with it dividend outlook — is in jeopardy of serious deterioration in coming years.

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Royston Wild 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.