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Should you buy this FTSE 100 dividend stock and its 5.7% yield?

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If you’re searching for cheap FTSE 100 dividend stocks then J Sainsbury (LSE: SBRY) could well be on your radar. But be warned — this fallen grocery giant is loaded with long-term risk.

Britain’s supermarkets are doing a roaring trade in the current crisis as citizens load up on essentials. Alvarez & Marsal says that “food will remain a clear winner”. With bars, restaurants and other similar establishments shuttered, it says spending will continue to be diverted towards the grocery segment. It’s why the consultancy now expects sales growth here of 7.5% in 2020, up from 2.6% previously.

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Don’t get carried away

Don’t be fooled into thinking that Sainsbury’s and its peers are riding the crest of a wave, however. In a recent piece on Tesco, I noted how the country’s biggest retailer is enduring “significant cost increases” as staff are off due to illness and it pays increasingly high costs to secure supplies. It’s a scenario that its blue-chip peer is battling too.

Investors need to be concerned by the high-risk profits picture for Sainsbury’s over a longer time horizon. The FTSE 100 firm has been the biggest loser as price wars between the so-called Big Four operators have hotted up.

Stack of new one pound coins

Moving online

It’s a trend that the German discounters Aldi and Lidl set in motion. Their aggressive store expansion schemes intensified the battle to offer the cheapest price points. And recent news suggests that the established chains face a fight online as well.

Aldi has long sold wines online, but it’s taking steps to sell a wider product offer to internet shoppers. From today, the business will begin selling online food parcels on its website in order to help vulnerable citizens and those who are self isolating during the pandemic.

Said packages will cost £24.99 and contain foodstuffs like tinned soup, rice, tea and pasta, as well as essential household items like soap and toilet roll. This is a far cry from the sophisticated operations that Sainsbury’s and its peers offer, sure. But this first step into cyberspace could herald something much grander in the future. Rumours emerged last autumn that Lidl is making plans to sell through the net after it advertised a Digital Project Manager position on its website.

I’d avoid this fallen FTSE 100 star

It may not be long before Sainsbury’s sees another huge exodus of its customers to Aldi and Lidl. Forget about their web ambitions for a second. A painful recession would encourage more of the Footsie firm’s loyal customers to decamp to its cheaper rivals.

Don’t forget that the 2008/09 banking crisis proved the making of the discounters as shoppers tried to stretch their budgets that little bit further. A repeat performance would require the likes of Sainsbury’s to engage in further rounds of earnings-crushing price cuts to stop sales grinding to a halt completely. And this time around, the economic landscape could prove a lot more challenging than it was a decade ago.

So forget about the Footsie company’s low forward P/E ratio of 9.5 times and massive 5.7% dividend yield. I think this FTSE 100 dividend stock should be avoided at all costs.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. 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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