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As a possible revenue inventory, J Sainsbury (LSE: SBRY) has dropped onto my radar once more.
For a very long time, I’ve insisted on a dividend yielding at the least 5% from corporations working within the grocery store sector. That type of return makes the chance of holding the shares worthwhile.
Nonetheless, J Sainsbury shot up on the finish of 2023, inflicting the yield to drop decrease. So it was off limits for me till weak spot within the share worth this yr.
Now, with the share worth close to 256p, the forward-looking dividend yield for the buying and selling yr to February 2025 is above 5% once more.
Money circulation is king
However grocery store companies are low margin, excessive turnover operations. Issues can shift simply when juggling the large numbers of income and prices, and that may result in decrease income.
We noticed Tesco get into hassle a number of years again and the same situation might occur with Sainsbury’s sooner or later. In any case, the sector is fiercely aggressive, and the rise of discounting operators like Aldi and Lidl appears unstoppable.
Nonetheless, one benefit J Sainsbury does have is steady money circulation. That’s a necessary ingredient for any enterprise backing a dividend-paying inventory. It takes money to pay dividends and the grocery store sector is understood for its defensive traits. In different phrases, grocery store companies are much less cyclical than many others.
Right here’s the money circulation and dividend report with the per-share figures proven in pence:
| 12 months to February | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024(e) | 2025(e) |
| Working money circulation per share | 56.2 | 42.3 | 55.5 | 106 | 42.9 | 92.9 | ? | ? |
| Dividend per share | 10.2 | 11 | 3.3 | 10.6 | 13.1 | 13.1 | 13 | 13.8 |
I just like the money circulation numbers being a lot bigger than the dividend figures. Nonetheless, can wholesome quantities of money circulation proceed?
Investing for progress
Traders seem like a bit unsure about that judging by the current drop within the share worth. Maybe the corporate’s technique replace launched on 7 April 2024 explains among the concern.
The administrators intend to extend capital expenditure to be able to construct future progress and “improve returns for shareholders”. A part of the plan includes opening round 75 new Sainsbury’s native comfort shops over the following three years.
Will elevated capital expenditure compete with the money obtainable for dividends? Perhaps. However the firm expects money circulation to extend as income develop.
The administrators, in the meantime, declared their dedication to a progressive dividend and share buyback coverage. They stated: “a better stage of capital funding is balanced with a bolstered dedication to robust free money circulation era and stronger returns for shareholders”.
In additional element, the thought is to start rising dividends from the beginning of the brand new buying and selling yr on the finish of February 2024. On high of that, a £200m share buyback programme will unfold over the course of the following buying and selling yr to February 2025.
There’s no point out I can see of rebasing the dividend decrease earlier than elevating it incrementally! In the meantime, Metropolis analysts have pencilled in an uptick within the shareholder fee for the approaching yr.
There are uncertainties, in fact. However on stability, I see J Sainsbury as price dividend buyers’ additional analysis time now.
