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Is J Sainsbury plc Really About To Cut The Dividend?

Sainsbury’s (LSE: SBRY), like the rest of Britain’s established grocery chains, has failed to get to grips with an increasingly challenging trading environment.

So reports at the weekend that the firm’s urgent need to restructure will force it to severely scale back the interim dividend in tomorrow’s half-year report comes as no surprise. Sainsbury’s is tipped to report a pre-tax profit of £350m for April-September, down 12.5% from the corresponding 2013 period.

Rumours of severe dividend cuts across the sector have been doing the rounds after Tesco was forced to cut slash its own interim by three-quarters back in August, to just 1.16p per share.

The relentless march of budget chains like Aldi and Lidl — and to a lesser extent the rising popularity of premium grocers like Waitrose — has caused revenues to dive at the likes of Sainsbury’s in recent years. Indeed, latest Kantar Worldpanel data showed till activity slide 3.1% during the 12 weeks to October 12. This in turn pushed the London firm’s market share spiralling to 16.1% from 16.7% during the same period last year.

In a bid to cure this tailspin Sainsbury’s is increasingly being dragged into a bloody price war, further knocking the balance sheet and casting doubt on shareholder payments. Net debt rose 10% in the last fiscal year to £2.38bn, an unsustainable trend which could threatens to dent shareholder payouts.

The business is also being forced to chuck vast sums into the hot growth areas of online and convenience to steady the ship, while its own entry into the discount space by bringing Denmark’s Netto back to the UK will also sap the cash as stores are gradually rolled out.

Dividends poised to dive

In the face of these problems, City analysts expect total profit before tax to slump 25.4% during the year concluding March 2015, to £670m. And a further 7.5% fall is chalked in for the following 12-months to £620m.

As a result the grocery titan is anticipated to take the hatchet to the full-year payout, and the number crunchers expect a 22% reduction to transpire in fiscal 2015, to 13.5p per share. But the troubles do not stop here, with an additional 5.2% cut predicted for 2016.

These projections still create blistering yields, mind, with readouts of 5.2% and 4.9% for 2015 and 2016 correspondingly making mincemeat of a forward yield of 3.4% for the FTSE 100.

But should tomorrow’s financial update come in worse than expected then these figures could be subject to brutal downgrades. And with the country’s discounters embarking on mammoth expansion packages, Sainsbury’s could be set for a period of severe earnings — and consequently — dividend pressure.

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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.