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Forget the State Pension, Sainsbury’s is a FTSE 100 dividend share that may be all you need

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The investment potential of FTSE 100-member Sainsbury’s (LSE: SBRY) seems to have improved in the last couple of years. The supermarket retailer has engaged in significant M&A activity, with it first adding Argos to its business and then following this up with the deal to buy Asda. As a result, its dividend growth potential seems to have improved.

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Improving outlook

The stock in question is advertising and PR specialist M&C Saatchi (LSE: SAA). The company reported a positive set of interim results which suggest that further profit growth is ahead. Gross profit for the first six months of the year increased by 5% to £127.2m, while profit before tax moved 26% higher to £16.7m.

The company’s global network performed well, with like-for-like (LFL) gross profit in the UK rising by 10%. There was also positive performance in the rest of the world, with the company’s strategy of opening new businesses and offices set to deliver further improvements to its financial performance. The company also separately announced that its CFO will be standing down in the next 12 months.

Looking ahead, M&C Saatchi is forecast to post a rise in earnings of 11% in each of the next two financial years. Despite this, it trades on a price-to-earnings growth (PEG) ratio of just 1.5, which suggests that it could be undervalued.

With a dividend yield of 2.8%, the stock may seem to lack income appeal. But with dividends due to rise by 10% per annum over the next two years, and shareholder payouts being covered 2.2 times by profit, the total return potential of the stock seems to be high.

Improving outlook

The dividend growth potential of Sainsbury’s also seems to be relatively impressive. The company’s shareholder payouts are covered 1.9 times by profit, and could be positively catalysed by the earnings growth which is forecast over the next two years. The business is expected to deliver bottom-line growth of 2% this year, followed by a further rise of 4% next year. Given the challenging trading conditions faced across the UK retail sector, this would represent a strong performance.

As mentioned, the acquisitions of Argos and Asda could fundamentally reshape the Sainsbury’s business model. Synergies from the deals could provide a boost to profitability, while the cross-selling opportunities appear to be high. The benefits of the acquisitions could help to shield the wider business from the effects of higher inflation and Brexit uncertainty at a time when competition in the retail segment continues to increase.

With Sainsbury’s having a dividend yield of 3.4%, its income return is likely to remain above inflation over the coming years. Since it has the potential to become an even more dominant UK retailer over the long term, now could be the right time to buy it. The stock could help investors to overcome that disappointingly-low State Pension.

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Peter Stephens owns shares of Sainsbury (J). The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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