Sainsbury’s shares: a decent passive income stock to buy?

Sainsbury’s shares are largely unmoved despite a positive Q3 update. With a dividend yield of 5%, should I buy the stock today?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

happy senior couple using a laptop in their living room to look at their financial budgets

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Supermarket shares like Sainsbury’s (LSE:SBRY) saw monumental declines in 2022 due to the cost-of-living crisis. Nonetheless, the stock is now up 40% from its bottom, and even reported a positive set of Q3 results. With a decent dividend yield of 5%, I could be tempted to buy the stock.

Christmas cheer

Sainsbury’s released its latest Q3 update yesterday. There was an improvement to its underlying sales growth, but it’s important to note that the numbers don’t take the impact of double-digit grocery inflation into account.

MetricsQ3 2023Q3 2022
Grocery5.6%12.5%
General merchandise4.6%-6.9%
Like-for-like sales (ex. fuel)5.9%-4.5%
Like-for-like sales (inc. fuel)6.8%0.6%
Data source: Sainsbury’s

Nevertheless, CEO Simon Roberts was still bullish. He upgraded the FTSE 100 firm’s outlook, and now expects profits before tax to hit the upper end of its guidance of £630m to £690m. He even raised the company’s free cash flow guidance to £600m for FY23.

Sainsbury’s results aren’t eye-catching by any means, but this update showed plenty of encouraging signs that the company is beginning to establish a unique position among consumers. In fact, it outperformed many of its largest competitors on many fronts.

Seeing the difference

Its investment of £550m to expand its Aldi price match range, and delay raising prices after the rest of the market, has proven to be beneficial. Consequently, the average selling price for its top 100 products is the lowest in the industry. As a result, customer satisfaction hit an all-time high in Q3.

Hence, it’s no surprise that Sainsbury’s did so well over the Christmas period. Additionally, the board mentioned that it’s seeing less down-trading to other supermarkets. And despite declines in grocery volumes, it still managed to outperform Tesco, Asda, and Morrisons in the quarter.

This shows that its investments are paying off, and the latest Kantar grocery market share data backs this up. Since bottoming in September, Sainsbury’s has staged a strong recovery, taking market share away from the likes of Asda and Morrisons.

Supermarket Market Share 2022
Data source: Kantar

Picking the best stock

So, are Sainsbury’s shares worth buying? Well, its dividend yield of 5% is well covered at 1.9 times. As such, the group’s dividends could help me generate passive income, given the strong history of paying steady and growing dividends.

Sainsbury's Dividend History
Data source: Sainsbury’s

Moreover, its strong debt-to-equity levels, declining debt pile, and steady free cash flow are definitely a positive. That being said, its razor-thin profit margins of 1%-2% are something I’m wary of. Management’s move to increase prices later than the rest of the industry allowed it to capture market share. But this also prevents Sainsbury’s from expanding its margins.

Sainsbury's Financials
Data source: Sainsbury’s

I’m confident that the Sainsbury’s share price should see further upside in the short term. Food inflation is finally starting to trend down, and the declines in energy and commodity prices are yet to be realised. Even so, I don’t quite see how Sainsbury’s shares can grow exponentially over the long term. The conglomerate’s e-commerce businesses are growing, but not enough to grow its bottom line substantially.

Grocery Price Inflation (Y/Y)
Data source: Kantar

The stock’s valuation multiples certainly indicate fair value at these prices, and its history of steady dividend payments are definitely worthy of an investment.

MetricsValuation multiples
Price-to-earnings (P/E) ratio10.0
Price-to-sales (P/S) ratio0.2
Price-to-book (P/B) ratio0.7
Price-to-earnings growth (PEG) ratio0.1
Data source: YCharts

However, there are other UK shares with better growth potential, higher dividends, and better margins, such as Glencore and Taylor Wimpey. I’m more inclined to invest in those names rather than Sainsbury’s shares. After all, JP Morgan has an ‘underweight’ rating on the stock with a price target of £2.13.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. John Choong has no position in any of the shares mentioned. The Motley Fool UK has recommended J Sainsbury Plc and Tesco Plc. 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.

More on Dividend Shares

Investing Articles

How to target a £100,000 second income starting with just £1,000

Zaven Boyrazian explains the various strategies investors can use to try and earn a £100,000 second income in the stock…

Read more »

Investing Articles

Should investors consider these 30 dividend stocks for their SIPP for ENORMOUS retirement income?

Zaven Boyrazian shares the growing list of British stocks hiking dividends for more than 20 years in a row that…

Read more »

Investing Articles

Here’s how an investor could start building a £10,000 second income for £180 per month in 2025

Our writer illustrates how an investor could put under £200 each month into shares and build a long-term five-figure passive…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

£20k of savings? Here’s how an investor could turn that into passive income of £5k a year

A £20k lump sum, invested in a mix of blue-chip shares with a long-term approach, could generate thousands of pounds…

Read more »

Solar panels fields on the green hills
Investing Articles

This renewable energy dividend stock offers a huge 13% yield

Dividend stocks focused on solar and other renewable energy sources are falling out of favour. It's time to take a…

Read more »

Fans of Warren Buffett taking his photo
Investing Articles

When it comes to passive income, I think investors should listen to Warren Buffett’s advice about Olympic diving

When it comes to investing, Warren Buffett thinks it’s best to keep things simple. With Olympic diving, though, it’s a…

Read more »

Investing Articles

Here are 5 of the most popular passive income stocks investors are buying

These are the most bought passive income stocks in December, but are they truly good investments? Zaven Boyrazian looks at…

Read more »

Investing Articles

What on earth is going on with the S&P 500?

Our writer looks at why the S&P 500 has been volatile in December, as well as highlighting a FTSE 100…

Read more »