J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) shares have been recovering over the past couple of months, but after a slide that started late in 2013 they’re still down 10% over the past year, to 335p today.
Even over five years, we’ve only seen a 10% price rise, while the FTSE has climbed by around 55%. Sainsbury’s shareholders, however, have been enjoying dividend yields of about 5% which have beaten the FTSE’s average of nearer 3%, and that’s a pretty nice return — and unusually high for a supermarket.
Bargain?
Does that mean we’re looking at a bargain here? With the shares on a forward P/E of only 11.5, we could be, so let’s see what Sainsbury’s shares might be worth in another five years time.
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We’ve already seen five years of strong earnings per share (EPS) growth, of between 6% and 13% per year. Although there’s a small fall in EPS predicted for the year ending March 2015 and a flat year penciled in to follow, growth is expected to continue over the next five years — and going by the latest City forecasts, an EPS figure of 37p per share by March 2109 wouldn’t seem too far-fetched.
If the shares are a bit cheap as I suspect, we could also see the price returning to an average P/E of around 14 over the same period. That would suggest a share price of 518p, which is up 55% on the current price of 335p — and that’s pretty much bang on the FTSE’s return over the past five years, so we could be looking at a reversal in relative performances.
Add in the cash
Then, of course, there are those dividends to add on top of any share price rise — and the consensus is that the annual cash payment will carry on rising nicely. In fact, forecasts are predicting something like a total of 95p over the five-year period. And if we add that to the mooted 518p share price, we’d take the value of a Sainsbury’s share as high as 613p for an overall 83% gain — and I don’t see the FTSE matching that with dividends included over the next five years.
While that might make Sainsbury’s sound like a reasonable investment right now, brokers are pretty non-committal at the moment, with the majority sitting on a Hold stance and only a few venturing either side of that.
Looking attractive
But those dividend yields are very attractive for the supermarkets, and the whole sector looks out of favour these days — shares in Tesco and Wm Morrison are similarly depressed. With the UK returning to growth, now might turn out to be a good time to get into a supermarket recovery.
