Is J Sainsbury (LSE: SBRY) the FTSE 100’s best dividend stock to buy? Well, on paper the supermarket offers plenty of potential for income investors. City analysts think the company will pay an 11.5p per share total dividend in the current fiscal year (to March 2022). This creates a meaty 3.9% dividend yield, comfortably better than the FTSE 100 3.4% average.
In addition, Sainsbury’s is expected to lift the annual dividend to 11.9p in financial 2023, nudging the yield to an even better 4.1%. The icing on the cake is that these projected rewards are covered 1.9 times by anticipated earnings.
This is a whisker away from the safety benchmark of two times. At this level a company is able to pay shareholders the predicted dividend while still investing in the business and not having to dive into its cash reserves.
Low P/E ratios
Sainsbury’s could be considered one of the best value FTSE 100 stocks to buy from an earnings perspective too.
City brokers believe the grocer’s annual earnings will rocket 93% in fiscal 2022. Consequently it trades on an ultra-low forward price-to-earnings growth (PEG) ratio of 0.1. A reminder that any reading below one suggests a stock could be undervalued by the market.
Reasons to buy Sainsbury’s shares
In theory there’s a lot to like about Sainsbury’s as a dividend stock. While the broader retail sector can suffer when times are tough, food is of course one of those commodities that people cannot do without. This gives the FTSE 100 supermarket excellent earnings stability during economic upturns and downturns, one of the cornerstones of a healthy dividend policy.
There’s other reasons why Sainsbury’s might be considered a great stock to buy. It has one of the best online operations in the business, leaving it well placed to ride the e-commerce boom. There’s also the possibility that the Sainsbury’s share price could soar as takeover action in the UK retail space heats up.
As analysts at Hargreaves Lansdown recently noted: “while [the Morrisons] takeover story might be wrapping up soon, that doesn’t mean we won’t see others”.
A risky FTSE 100 stock
All that being said, I’m not tempted to buy Sainsbury’s right now, not even at today’s price of 300p. In my opinion, its low valuation reflects the spectrum of dangers that cloud its long-term future. The problem of rising competition online and for its physical stores is one. Amazon just opened its first non-food store in the UK in what could be seen as serious competition to Argos. Of course Sainsbury’s faces intense competition in the grocery field, too. There are discounters Aldi and Lidl, as well as established heavyweights like Tesco.
I’m also concerned that profit margins at Sainsbury’s will suffer as costs rise in a post-Brexit environment. Tightened immigration rules threaten to drive labour costs up. And fresh trade barriers mean that it could struggle to keep its shelves filled. All things considered I’d rather buy other, lower-risk FTSE 100 stocks right now.
